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PRINCIPLES OF 
POLITICAL ECONOMY 



BY 

THOMAS NIXON CARVER 



GINN AND COMPANY 

BOSTON • NEW YORK • CHICAGO • LONDON 
ATLANTA • DALLAS • COLUMBUS • SAN FRANCISCO 



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COPYRIGHT, 1919, BY THOMAS NIXON CARVER 
ALL RIGHTS RESERVED 






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GINN AND COMPANY • PRO- 
PRIETORS • BOSTON • U.S.A. 



ICI.A5L1816 



TO 

ALL THOSE 

WHO CARE TO SEE THEIR COUNTRY 

GROW STRONG AND GREAT 



INTRODUCTION 

At no period in the history of democracy have men been 
compelled to think so seriously about the question of the 
strength of democratic nations as at the present time. At no 
time was it ever so plain that the question of national strength 
is largely an economic one. It is the purpose of this book to 
examine the economic foundations of our national strength 
and to point out some of the more direct methods of improve- 
ment, to the end that our democratic nation, and all democratic 
nations, may grow prosperous and great in all the elements of 
national greatness. 

This result can never be achieved unless the people them- 
selves understand the economic principles upon which national 
prosperity and greatness depend. Subject peoples may ignore 
these principles, relying upon their rulers to supply the neces- 
sary economic knowledge and expertness. Democratic peoples 
have no one to depend upon but themselves ; therefore they 
must know for themselves the leading principles of the science 
of political economy. 



CONTENTS 

PART ONE. THE UNDERLYING CONDITIONS OF 
NATIONAL PROSPERITY 

CHAPTER PAGE 

I. Economy 3 

II. Wealth and Well-Being 12 

III, Self-Interest . 22 

IV, Competition 37 

V. Law and Government 50 

VI. Morals and Religion 64 

VII. The Geographical Situation ■. 78 

PART TWO. PRODUCTION 
SECTION A. THE PRODUCTIVE FORCES 

VIII. The Primary Factors of Production 89 

IX. The Quality of the People loi 

X. The Division of Labor 119 

XL Power 132 

XII. Land 142 

XIII. Capital 155 

XIV. The Organization of Business 168 

XV. The Balancing of the Factors of Production . . 181 

SECTION B. THE PRODUCTIVE INDUSTRIES 

XVI. The Extractive Industries . . . 193 

XVII. The Genetic Industries 208 

XVIII. The Manufacturing Industries 221 

XIX. Transportation 233 

XX. Merchandising 245 

XXI. Personal and Professional Service 255 

vii 



viii PRINCIPLES OF POLITICAL ECONOMY 

PART THREE. EXCHANGE 

CHAPTER PAGE 

XXn. Value 265 

XXHI. Scarcity 281 

XXIV. Money 292 

XXV. Banking 304 

XXVI. Marketing 318 

XXVII. Economic Crises 329 

XXVIII. Free Trade 338 

XXIX. Protectionism 348 



PART FOUR. THE DISTRIBUTION OF WEALTH 

XXX. The Law of Variable Proportions 365 

XXXI. The General Nature of the Wage Question , 378 

XXXII. What Determines the Rate of Wages? . . . 388 

XXXIII. The Organization of Laborers 400 

XXXIV. The Rent of Land 409 

XXXV. The Source of Interest 418 

XXXVI. The Cost of Capital and its Price 429 

XXXVII. Profits 441 

■ PART FIVE. THE CONSUMPTION OF WEALTH 

XXXVIII. The Meaning and Importance of Consumption . 453 

XXXIX. Rational Consumption 461 

XL. Luxury 472 

XLI. The Control of Consumption 486 

XLII. The Battle of the Standards . 495 

PART SIX. PUBLIC FINANCE 

XLIII. Taxation 503 

XLIV. The Financing of a War 514 



CONTENTS ix 
PART SEVEN. REFORM 

CHAPTER PAGE 

XLV. Communism 531 

XLVI. Socialism 541 

XLVII. Anarchism ' . . . ^55 

XLVIII. The Single Tax 563 

XLIX. Constructive Liberalism 572 

INDEX . . s^s 



PART ONE 

THE UNDERLYING CONDITIONS OF NATIONAL 
PROSPERITY 













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CHAPTER I 

ECONOMY 

What it means to economize. To economize is to choose 
among several different things which one would like to have, 
giving up the things for which one cares less in order to have 
the thing for which one cares more. Necessity forces this 
kind of choosing not only upon individuals but also upon 
communities and nations. Economics is the name given to 
a body of principles which govern the practice of economy 
in its broadest sense. 

This choosing of what one will have takes on many and 
various forms. It may be a question as between play and 
work or between different kinds, of work, different kinds of 
play, or different objects which one might purchase with one's 
limited money or purchasing power. The problem is always 
how to use one's time, one's working power, or one's money 
in such a way as to accomplish the most in the promotion of 
one's interest or the fulfillment of one's hopes and purposes. 
This is a problem, however, not for the individual alone but 
for the community, the nation, and the world at large. The 
community and the nation, like the individual, have common 
interests which can be promoted only by common effort. 
How to use the energy of the community and of the nation 
economically, that is, in such a way as to accomplish the 
largest and best possible results, is a problem of the greatest 
possible importance. In a democracy especially it is fully as 
important that the citizen should understand how the com- 
munity and the nation may economize their energies and 
achieve the utmost in the way of civilization and well-being 

3 



4 PRINCIPLES OF POLITICAL ECONOMY 

as it is that he should understand how he may economize his 
own individual energy and accomplish the utmost in the pro- 
motion of his own interest and the fulfillment of his hopes. 
Moreover, the former is a vastly greater and more difficult 
problem than the latter. It will require a broad, careful, and 
systematic study of economic principles instead of a narrow, 
piecemeal, haphazard study of individual problems in economy. 

When you are asked to do a certain thing and you reply 
that you have not time, you are sometimes merely trying to 
be polite. You may really mean that there is something else 
which you would rather be doing with your time, or which 
you feel that it is more important that you should do, than 
the thing you are asked to do. In other words, you have 
not time and energy enough to do everything you would like 
to do or that others would like to have you do. You must 
leave many things undone, and you must, therefore, choose 
rather carefully the few things that you think most impor- 
tant or that would cause you the most inconvenience or 
pain if you left them undone. In order that you may do 
these few and important things, you must refuse to do any- 
thing else that would interfere. That is what it means to 
economize time and energy. It is choosing to do the more 
important things, leaving the less important things undone. 
Economizing in the use of money is only one special form of 
economizing time and energy, since money represents the 
products of time and energy. 

Why we have to economize. In saying that you do not have 
time to do a certain thing, you are stating one of the most 
fundamental facts of life ; namely, the great and ever-present 
fact of scarcity. It is this fact which compels us to economize, 
which compels us to make our limited fund of energy and our 
limited time go as far as they will. To waste time or energy 
is to fail to supply ourselves with some of the things we want. 
To waste things that have already been produced is no worse 
than to waste the time and energy that might have produced 



ECONOMY 5 

more of the same things. Wasting time and energy is not 
necessarily remaining idle, though it may mean that. It may 
also mean the doing of less important things when there are 
more important things to be done. If one had unlimited 
time and energy, or if one had the time and energy necessary 
to do everything one would like to do, so that the doing 
of one thing never prevented the doing of anything else that 
was worth doing, economy would be unnecessary. If that were 
true, human life and human history would be very different 
from anything we now know, and this world would be so unlike 
the present world that none of us would recognize it. 

But time and energy are in a sense convertible into goods 
and commodities; that is, into the products of industry which 
are the means of satisfying our desires. Therefore, when we 
say that we cannot afford a certain article, we mean very much 
the same thing, fundamentally, as when we say that we have 
not time to do a certain thing. In both cases we are merely 
stating the great fact that it is necessary to economize, to 
choose what we will do with our limited energy or our limited 
money to the exclusion of other things. The fact that time 
and energy are insufficient to enable us to do everything that 
we might like to do makes it certain that we cannot produce 
everything that we should like to have, and that, if we could, 
we should not have time to do something else. If we were 
to work all the time, we should have no time to play; and 
everybody likes to play — that is, everybody worth mention- 
ing. We must therefore choose whether to deprive ourselves 
of the opportunity to play in order to get certain goods that 
we want, or to reduce somewhat the number of goods we con- 
sume in order to have more time to play. Again, if one works 
too long on one kind of goods, one has less time and energy 
left to produce others. At every step in the life of every nor- 
mal human being, therefore, he is confronted with some prob- 
lem in economy. As already stated, the necessity for economy 
grows out of the scarcity of something or other, — either time 



6 PRINCIPLES OF POLITICAL ECONOMY 

and energy, on the one hand, or some form of material goods, 
on the other. Find an individual who experiences no lack or 
scarcity of anything, and I will show you an individual who 
has no need for economy ; but you will look a long time 
before you find him. 

Getting and spending. In the practical everyday life of the 
average person problems of economy are mainly focused on the 
problems of getting and spending, — of income and expendi- 
ture, or of business and the household. If one's income is 
less than one would like to have it, it means that one's desires 
run beyond one's income. Such an individual therefore tries, 
first, to increase his income and, second, to get as much good 
out of it as he can ; that is, to spend it as wisely as he knows 
how. This is true not only of every individual and every 
family but also of every organization, even the State itself, 
and it is even true of all the people as distinct from their 
government. The greater part of the time and energy of the 
people of this world is spent on these matters, but it is spent 
in a great variety of ways. 

A glance at the diagram at the beginning of this chapter 
will give one a general idea of all the forms in which the prob- 
lem of income and expenditure presents itself. The reader will 
get, at the same time, an idea of the principal branches of the 
great science of economics, for economics is, in one aspect, 
simply the study of the problem of income and expenditure. 
This problem is in turn the problem of economizing time and 
energy, on the one hand, and goods, on the other. Another 
way of saying it would be that it is the effort to make things 
that are scarce go as far and accomplish as much as possible. 

Economics, — household management. Originally the word 
economics meant "the principles of household management." It 
comes from the two Greek words, oIko^, ''a house," and vefxa), 
'' manage." It was simply a study of the principles of house- 
hold management. In Xenophon's treatise on this subject he 
discusses the management of a simple rural household, in 



ECONOMY 7 

which the business that furnishes the income is united with 
the home in which the income is spent or utiHzed. In fact, 
it was the kind of rural household that some men now living 
can still remember, where nearly everything consumed in the 
household was produced on the farm, so that there was com- 
paratively little buying and selling. In such a household the 
problems of income and expenditure, of business and home 
life, are not very widely separated. The income was made up 
of the products of the farm and not of the money for which 
they were sold, because they were not sold at all. The expendi- 
ture, if such it may be called, was merely the utilization of those 
products, and not the spending of money, because there was 
no money to spend. In the broadest sense, as we shall see a 
little later, that is what constitutes the income and expenditure 
of the people as a whole. Individuals may buy and sell among 
themselves, but the people as a whole consume their own 
products. In recent times, especially in our cities, the busi- 
ness that is the source of income is so widely separated from 
the home, where the income is utilized, as to make them seem 
like different problems altogether. In fact, we now have two 
distinct subjects, or branches, of private economics, known 
respectively as business economics and home economics. That 
these two branches, which the Greeks regarded as parts of the 
same subject, are now so sharply separated is a sign that we 
have gone a long way from the condition in which business 
and life were united, toward a condition in which they are to 
be completely divorced. This should make us ponder seri- 
ously, because, while it is doubtless in many ways a good 
tendency, it is in other ways a bad one. 

Public income and expenditure. But the problem of income 
and expenditure is a serious question for the public as a whole 
as well as for the private citizen. The State gets its income 
from different sources and by different methods from those 
pursued by the individual, but income is as necessary to a 
State as to a citizen. In order that its limited income may 



8 PRINCIPLES OF POLITICAL ECONOMY 

go as far as possible and accomplish the greatest possible 
good, the question of public expenditure must be studied with 
the greatest care. It is scarcity in this case, as well as in the 
case of the individual, v\^hich makes economy necessary. If we 
could imagine a State with an unlimited income, — which we 
cannot, — so that when it spent money for one purpose it was 
not necessary to refrain from spending money for any other 
purpose, there would, of course, be no occasion for public 
economy. Xenophon, who wrote our oldest treatise under the 
title of '' Economics," also wrote a treatise on ''The Revenues 
of Athens." In the former work he was well within the field 
of private economics, but in the latter he had got well over 
into the field of public economics. This branch of public eco- 
nomics, or political economy (that is, the branch which deals 
with the revenues and expenditures of the State, or with what 
has been called the housekeeping of the State), is commonly 
called public finance. It will readily be seen that there is a 
close resemblance between public finance, which deals with the 
income and expenditure of the government, and private eco- 
nomics, which deals with the income and expenditure of the 
private family. 

Social well-being. But there is another branch of public 
economics which is broader than public finance ; that is, the 
branch which deals with the general problem of social wealth 
or well-being. This branch deals neither with the income and 
expenditure of the individual family as such nor with those 
of the government as such. It deals rather with the income 
and expenditure of the people as a whole. This is called 
social economy or social economics. It is the most impor- 
tant study for the real statesman or nation builder. Since in 
a democracy everyone is a nation builder, in a small way at 
least, in that he helps to determine the policy of the nation, 
it is of the greatest possible importance that everyone should 
study the problems of social economy as well as those of 
public finance and private economics. 



ECONOMY 9 

The management of the king's household. A good illustra- 
tion of the importance of this subject is found in the studies 
of a group of scholars who, some hundreds of years ago, were 
studying the problem of providing for the king's household. 
These were the finance ministers of certain kings of Euro- 
pean countries. They are now sometimes called the cameral- 
ists. Having charge of the affairs of the king's household, 
they were, in a sense, studying private economics ; but since 
the king was a public functionary, deriving much • of his 
revenue from taxation and other public sources and perform- 
ing many of the acts of government, these finance ministers 
were, in another sense, studying public economics. At any 
rate, they were severely put to it to find revenue enough to pay 
the expenses of the royal household or to keep the expenses 
within the royal revenues ; that is, to balance income and 
expenditure. These were problems in economy. How to get 
as large an income as possible with the limited energy at their 
disposal, and how to expend that income so as to add the 
maximum to the resources of the king's household, were 
very serious problems. 

The social income. The more they studied this problem, 
the more clearly they saw that in order to increase the royal 
incom_e the people over whom the king ruled must be made 
prosperous ; that is, the social income must also be increased. 
'' Poor people, poor king " came to be an axiom in public 
finance. Therefore attention was given to the problem of in- 
creasing the social income or of promoting the prosperity of 
all the people. Later writers have given their chief attention 
to this part of the problem. In the outline at the beginning 
of this chapter this is called social economy. 

Exchange. In one sense, as already pointed out, the social 
income is the annual production of the nation. So there 
was a tendency at first to give chief attention to the subject 
of production, but it was soon discovered that in social econ- 
omy exchange was an important factor. In studying th^ 



lO PRINCIPLES OF POLITICAL ECONOMY 

internal economy of an individual household, whether a pri- 
vate or a royal household, exchange among the members could 
be left out of account ; but in studying the internal economy 
of a whole nation it could not be left out of account, for the 
obvious reason that the citizens of the nation did a great deal 
of exchanging among themselves. This is particularly true of 
the modern nations. Buying and selling has come to be so 
large a part of the economic life of the people that for a long 
time it seemed to many students to be the most important 
aspect of economic life. So there came a time when the 
chief emphasis was laid upon exchange rather than upon 
production. Indeed, it was assumed for a time that produc- 
tion would almost take care of itself ; that is, each individual 
would look after his own part in it if only the government 
would provide him safe and open markets and a convenient 
medium of exchange in the form of money and sound banking 
facilities. 

Distribution of social income. Still later, another problem 
was discovered to be of equal or greater importance. Like the 
problem of exchange, this was one which could also be ignored 
in the study of private economics. It is the problem of the 
division of the products of industry among the workers. When 
a large number of people take part in the production of a given 
commodity, say shoes, the question as to how much of the 
value of the shoes shall go to each person or group of persons 
is of the utmost im-portance in social economy. The farmer, 
the -miller, and the baker, as well as the carrier, have all had 
something to do with the production of a loaf of bread. It is 
very important to know how much of the value of the bread 
goes to each of those who have had a part in its production. 
This is called the problem of distribution ; as you will see, it 
is somewhat different from the problem of exchange, though 
very closely related to it. Such questions as the wages of dif- 
ferent classes of laborers, the rent of land, the interest on capi- 
tal, the profits of enterprise, are parts of the general problem 



ECONOMY 1 1 

of distribution. During the last fifty years, it is fair to say, 
more emphasis has been laid upon the subject of distribution 
than upon either production or exchange. 

The utilization of the social income. While the consump- 
tion of the people has been recognized as the utilization of the 
social income, and therefore as a thing important in itself, yet 
students have almost ignored it as a branch of the science of 
economics. One reason has doubtless been the feeling that 
every individual would better be left to consume his income 
as he liked, whether he did it wisely or foolishly, beneficially 
or harmfully. Attempts to control or direct his consumption 
have been called sumptuary laws. By pronouncing these words 
with a wTy face such attempts may be discredited, that is, for 
a time. Meanwhile, however, every progressive community 
has gone right on passing sumptuary laws, in one form or 
another, sometimes to the great advantage of the people, some- 
times to their disadvantage. Students are therefore becoming 
convinced that the consumption of wealth merits a great deal 
of study, that it is going to be controlled and directed by the 
State whether we like it or not, and that whether it is con- 
trolled and directed wisely or unwisely will depend upon how 
carefully and intelligently it is studied. In fact, a few are 
already beginning to discover that consumption is more impor- 
tant than production, exchange, or distribution, — possibly more 
important than all three combined. 



CHAPTER II 

WEALTH AND WELL-BEING 

What are economic goods? Before we can go very far in 
our study of income and expenditure, or of production and 
consumption, we must get a fairly clear idea as to the sort 
of things that make up income, or the sort of things that 
men try to produce. When it was stated in the last chapter 
that the necessity for economy arose out of the fact of scarcity, 
it might have been guessed at once that the things that make 
up one's income in a strictly economic sense are the things 
that are scarce. More accurately, perhaps, we should say that 
the only things we try to produce are the things of which 
we do not have enough. It may sound a little queer at first 
for one to say that his income consists of things that are 
scarce, or things of which he does not have enough. It 
will therefore be necessary to spend some time in making this 
point absolutely clear ; otherwise we shall never be free from 
error and confusion. As a matter of fact, the very first step 
toward a true understanding of the nature of wealth is a clear 
perception that wealth in the economic sense consists of things 
that are scarce and so need to be economized. When it is 
said that the necessity for economy grows out of scarcity, and 
that we only try to produce the things that are scarce, we do 
not imply that everything is scarce. Some very useful things 
are very abundant, — so abundant that everyone can have all 
he wants ; and when he gets all he wants, no one else is 
deprived of anything that he wants. Such things do not have 
to be^^^^onomized ; hence they are not economic goods. In 
fact, so long as they are sufficiently abundant, they give us no 
concern ; but when they become scarce, we spend our time in 



WEALTH AND WELL-BEING 13 

trying to get more. Only those things are economic goods 
which have to be economized, that is, which are scarce, or of 
which we do not have as much as we should like to have. 

Two meanings of wealth. Now the word wealth has two 
meanings. In the first place, it is the collective name for all 
economic goods, or for all goods that have to be economized, 
— that is, for goods that are scarce. In the second place, it 
is the name of a condition or state of being. It comes from 
the older word weal, which means very much the same as 
well-being. These two meanings, while apparently different, 
are yet very closely related. The condition of well-being which 
we call wealth depends upon the possession of an adequate 
supply of those things which we call wealth, that is, the things 
which are ordinarily scarce and which have to be economized. 
He who lacks an adequate supply is poor ; he who possesses 
an adequate supply is rich or in a state of wealth. In short, 
those economic goods called wealth are the goods .upon 
which weal, or well-being, depends. Well-being is increased 
when these goods are increased or economized ; well-being 
is decreased when these goods are decreased or wasted. 

How well-being depends upon wealth. This could not be 
said of anything which is not scarce. There is such an abun- 
dance of air, for example, under ordinary circumstances, that 
no one would be any better off than he is now if the supply 
of air could be increased, nor would anyone be any worse off 
if the supply of air were slightly decreased. In other words, 
no one's well-being depends upon more air, even if it could 
be produced. If, however, air were so scarce that there was 
not enough to go around, then not only would it need to be 
economized very carefully, but there would be some advantage 
in producing more of it. The weal, or well-being, of mankind 
would be improved in proportion as more air could be pro- 
duced ; mankind would be injured in proportion as air was 
wasted or destroyed. While, therefore, we can say that air 
is a necessity in a certain absolute sense, yet in a practical 



14 PRINCIPLES OF POLITICAL ECONOMY 

economic sense we cannot say that anyone would be better off if 
more air were produced or if it were even wisely economized ; 
nor can we say that anyone would be worse off if a little air 
were destroyed or wasted. There would still be enough to 
satisfy everybody. That is why air, though an absolute neces- 
sity, is not an economic good. We should gain nothing by 
trying to increase the supply or to economize in the use of 
the existing supply. Since we do not gain anything by econo- 
mizing it, it is not an economic good. Where abnormal cir- 
cumstances arise, in which there is not enough air, then it 
has to be economized and becomes at that particular time and 
place an economic good. If such circumstances could last, air 
would become wealth in the same sense that food, clothing, 
fuel, and certain other things are now wealth. It would then 
be true of air, as of these other things, that well-being could be 
increased by producing or economizing air and decreased by 
destroying it, wasting it, or otherwise making it scarcer. 

The question of having more or having less. Water is 
another illustration, perhaps a better one because there are 
many places where water is so abundant that it does not have 
to be economized at all, while there are other places where it 
is so scarce that it has to be economized very carefully indeed. 
In the former places water is not wealth ; in the latter it is. 
In the former no one labors to secure any more ; in the latter 
they do. In the former no one would be better off if there 
were more water ; in the latter some people would be better off. 
In the former, well-being does not depend upon a little more 
or a little less water ; in the latter it does. In the former class 
of cases there is no occasion for economizing water ; in the 
latter it is very important that it be economized and made to 
go as far as possible. In the former class of cases the formula 
'' more water, greater well-being ; less water, less well-being " 
is not true ; in the latter it is true. This is the test in every 
time and place as to whether water is wealth or not. All 
that has been said of water may be said of anything else. 



WEALTH AND WELL-BEING 15 

The same test must be applied to determine whether it is wealth 
or not. As a matter of fact, water, like a great many other 
things, is sometimes too abundant, — so abundant that men 
find it to their advantage to go to considerable pains in order 
to get rid of some of it or to lessen the supply. In such cases 
it may be called illth. In the diagram on page 16 is a classifi- 
cation of all tangible objects with which it would be possible 
for man to concern himself. Those which are harmful to him he 
must try to exterminate. Toward those which are useless with- 
out being in the way or being otherwise harmful he is indif- 
ferent. Those which are useful to him, called goods, concern 
him most. Of these, some are too abundant at certain times 
and places. In such times and places his attitude toward them 
must be very much the same as that toward those which are 
positively harmful. Yet when they exist in smaller quantities, 
that is, in quantities less than he needs, he will strive as hard 
to get more as he will strive to reduce the supply when it. is 
too abundant. Water in swampy land is an example of over- 
abundance ; in desert land, of underabundance. Manure in a 
city livery stable is an equally good example of overabundance ; 
in a sterile field, of underabundance. If the owner of the 
stable could not sell the manure, or induce someone to take 
it away, he would be willing to pay someone to remove it. 
To the market gardener it is wealth ; and if he cannot other- 
wise secure it, he will pay the owner of the stable for it. In 
that case it is scarce from the standpoint of the whole com- 
munity, and is therefore social wealth. If, however, there is 
more than even the market gardeners and farmers can use, 
they would be paid for hauling it away instead of having to 
pay for the privilege. Such goods, when they are overabun- 
dant, may, as suggested above, be called illth, to distinguish 
them from those which are underabundant and called wealth. 
Relation of value to economic goods. We have gone to con- 
siderable pains to point out that one characteristic of economic 
goods is that they are always scarce. It is this which gives 



1 6 PRINCIPLES OF POLITICAL ECONOMY 

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WEALTH AND WELL-BEING 17 

them the power to induce men to work. Another characteristic 
is that they all have value, or power in exchange. The power 
to command other desirable things in peaceful and voluntary 
exchange — that is, value — is very much the same as the 
power to induce men to work. That is to say, the thing which 
possesses one kind of power will always possess the other, if 
indeed it be not incorrect to speak of them as different kinds 
of power. The object which possesses this power to appeal 
to human motives in such a way as to induce men either to 
give up some desirable object in exchange for it or to labor 
in order to produce it, is always said to be valuable. This 
power depends in all cases upon the scarcity or insufficiency 
of the existing supply of the object in question. This simply 
amounts to the truism that a thing would not possess this 
power unless someone could be found who wanted more of 
it than he had. If a person or a considerable number of per- 
sons can be found who want more than they have, there will 
be someone who will give up something in order to get more 
or who will work in order to produce more. These things, 
again, are economic goods, or wealth. Since, as we have just 
shown, they all possess value, it amounts to the same thing to 
say that wealth consists of things that have value. In short, 
such words as wealth, value, economic goods, and economy all 
center around the one great fact of scarcity, that is, the insuf- 
ficiency of certain things at certain times and places to satisfy 
desires. Out of this great fact grow also such ideas as prop- 
erty, industry, and foresight. No one wants to secure property 
rights, for example, in anything of which everybody has enough. 
But when anyone fears that there may not be enough of a cer- 
tain thing to go around, and that he may, therefore, be left 
out, he naturally wants to guard against that calamity by get- 
ting possession of a supply. He will try to get possession of 
a supply either by producing it himself or by buying it of 
someone else, and he will try to guard his treasure carefully. 
When the State steps in and undertakes to protect him in his 



1 8 PRINCIPLES OF POLITICAL ECONOMY 

possession, he has then secured a property right in the thing 
in question. Again, productive industry, as already shown, 
is directed toward alleviating scarcity or increasing the sup- 
ply of something whose supply would otherwise be insuffi- 
cient. Frugality and foresight are exercised to provide against 
further scarcity. 

Meaning of scarcity. Now scarcity means nothing except 
insufficiency in a given time and place to satisfy the desires 
which exist in that time and place. It does not mean rarity, 
because, no matter how rare a thing may be, if there is as 
much as is wanted, it is not scarce ; and no matter how great 
the total quantity, if there is less than is wanted, it is insuffi- 
cient, or scarce. And it is always well to bear in mind that a 
thing is scarce, if at all, because the available quantity in a 
given time and place is insufficient. No matter how much 
water there may be in the Mississippi River, it does not alter 
the fact that water is scarce a few hundred miles to the west- 
ward ; no matter how much copper there may be in the 
bowels of the earth, it does not alter the fact that there is 
less copper in available form than is needed on the surface. 
It is this fact which induces men to labor to move things from 
one place to another. 

Before proceeding farther it is necessary to make one im- 
portant qualification. Men do not always know upon what 
their weal, or well-being, depends. If they are mistaken on any 
phase of this question, they will be placing a high value upon 
some things that are not good for them, and a low value or 
no value at all upon some things that are good for them. 
They are poor economizers who do this, but there are many 
poor economizers in the world. This is the same as saying 
that they will sometimes desire more of a thing than they 
have, when they really have too much already, or less than 
they have, when they really have too little already. With this 
qualification in view, all we can say is that men will regard 
as wealth everything upon which they think their well-being 



WEALTH AND WELL-BEING 1 9 

depends in the practical economic sense described above. That 
is, if they think they need more than they have, they will 
strive to get more, either by offering something for it, thus 
giving it a market value, or by trying to produce it, thus creat- 
ing an industry. This explains why it is that the student of 
economics is sometimes compelled to include among economic 
goods, or wealth, articles which he himself would not use 
or which he regards as deleterious, such as opium, alcoholic 
drinks, or tobacco. 

Importance of desiring the right things. Teaching or per- 
suading people to want the right things has commonly been 
regarded as the work of the educator and the preacher rather 
than the economist. The latter has not generally undertaken 
to pass judgment on the wants of the people. He has assumed, 
rather, that his work was done when he had shown how such 
wants as the people happen to have are satisfied and may be 
satisfied more and more fully. But no one who really has at 
heart the welfare of the people can be indifferent to the quality 
of their wants or desires. What men want most they will try 
hardest to get ; the character of their wants or desires, rather 
than their real needs, will therefore determine the character 
of their industries and their government. But, more important 
than that, if their desires are opposed to their needs (that is, if 
they desire things that are harmful to them), then the more effi- 
cient their system of production becomes the more harm they 
will do themselves. In that case an efficient industrial system 
promotes national deterioration rather than national well-being. 
If one were to make a study of the wreckage of nations, one 
would probably find that more had decayed because their wants 
were wTong than because they were not able to supply their 
wants. That is one reason why, as stated earlier in this chapter, 
the subject of consumption is of such tremendous importance. 

Necessity of economizing means of production. Thus far in 
discussing the necessity for economy we have been considering 
the direct satisfaction of wants and the means thereto. But the 



20 PRINCIPLES OF POLITICAL ECONOMY 

necessity for economy extends much farther than this. In 
the effort to overcome scarcity, that is, in the production of 
goods, it is necessary to make use of various factors of produc- 
tion, such as labor, tools, raw materials, etc. These also are 
scarce and have to be economized. To be sure, many things 
that are essential to production are not scarce. These are not 
considered as factors of production ; that is, they are not eco- 
nomic factors of production at all. Carbon dioxide is just as 
essential to the growing of plants as nitrogen, phosphorus, 
or potash ; but there is plenty of carbon dioxide in the air, 
whereas in most soils nitrogen, phosphorus, and potash are 
scarce or tending to become scarce. Therefore these three 
substances are considered as factors (that is, economic factors) 
in plant growth. Applying the same formula here as we did 
to other things earlier in this discussion, we can say, and say 
truly, " More nitrogen, more plant growth ; less nitrogen, less 
plant growth." Therefore agricultural production is increased 
by increasing the nitrogen in the soil. The same may be said 
of phosphorus and potash, but the formula does not seem to 
apply to carbon dioxide. This is a principle of the very great- 
est importance, as will be seen later. Some of the greatest 
problems in economics and social justice depend upon this 
principle and are incapable of solution without it. 

Why a thing has value. The fact that desirability and 
scarcity, and these alone, give value to a thing is perhaps 
clearly enough established by this time. Few will care to ques- 
tion the statement that not only must a thing be desired, but 
more must be desired than there is to be had, before men 
will strive to get more either by purchase or by production. 
Moreover, this is as true of a factor used in production, such 
as tools, as of an article of direct consumption, such as bread. 
It may not be quite so obvious, but it is none the less true, that 
this is also one of the great sources of -that conflict of human 
interests which gives rise to most of our problems of justice 
and equity. This will be discussed in the next chapter. 



WEALTH AND WELL-BEING 21 

TEN CHARACTERISTICS OF ECONOMIC GOODS, OR WEALTH 

1 . They are scarce ; that is, there is less of them than is wanted. 

2. They have to be economized. 

3. Well-being is thought to increase as they increase and to decrease as 
they decrease. 

4. Men labor to produce them, that is, to make them less scarce. 

5. Men try to secure them by purchase. 

6. They have value, or power in exchange. 

7. They become the subject of property rights. 

8. Wise men exercise frugality and foresight with respect to them. 

9. There is a conflict of interests among men with regard to them, 
because there is not enough of them to go around and satisfy everybody. 

10. They give rise to questions of justice and equity. 



CHAPTER III 

SELF-INTEREST 

The fact that we are going to study the problem of national 
prosperity and progress certainly implies that we have an inter- 
est in it. It probably implies also that we care somewhat more 
for the prosperity or progress of our own nation than for that 
of other nations. That would mean that we are somewhat 
self -centered. Even the humanitarian who professes to care 
for mankind above all nations seems still to prefer mankind 
to other species. There are people who have so deep an 
interest in animals as to make them unwilling to sacrifice any 
animal for the benefit of mankind. They are slightly less self- 
centered than the humanitarians, but even they cannot take 
quite the same interest in the lower as in the higher animals. 
In short, no one can avoid being slightly self -centered, caring 
more for some animals than for others, for certain races or 
nationalties of men than for others, or even for certain per- 
sons than for others. Generally it will be found that those 
species, nationalities, or persons for whom we care most are 
in some sense nearer to ourselves than those for whom we 
care least. 

This fact of self-centered interest must be taken as one of 
the original, or primary, facts in our problem of nation build- 
ing. It is therefore very important that we examine it and 
see exactly what it means. 

What is self-interest? Our discussion will center naturally 
around two main questions : first, what does it mean to be self- 
interested ; and, second, is it a good or a bad thing for each 
individual to be self-interested, or at least slightly self-centered, 
as we shall call it. In discussing the first of these questions 



SELF-INTEREST 23 

it is not necessary to go very far into that form of hair-splitting 
analysis which considers whether benevolence is not merely 
another form of selfishness. ^ It is sometimes argued by a 
certain kind of sophist that the benevolent person is benevo- 
lent because he gets pleasure from being benevolent. Since 
it gives him pleasure, it is only a form of self-gratification ; and 
since it is only a form of self-gratification, it is only another 
form of selfishness. It may be true, from a certain point of 
view, that a man may get more pleasure from the taste of food 
upon the palates of his children than upon his own. A soph- 
ist might say that he was as truly selfish as a man who got 
no pleasure whatever from the taste of food upon any palate 
but his own. However, no sensible person would remain long 
in doubt as to which would make the better father. There is 
no doubt that the man who takes some delight in the welfare of 
his neighbors and fellow citizens is a better neighbor and citizen 
than a man who takes no pleasure whatever in such things. 

In trying to understand what self-interest really is, there 
are two extreme views to be avoided. One is that self-interest 
means such extreme selfishness as to show no regard whatever 
for the interests of others ; the other is that benevolence means 
a real preference for other people as compared with self. Now 
self-interest simply means some preference for self as com- 
pared with certain other people ; and benevolence, instead of 
meaning a preference for other people, is quite compatible 
with some degree of preference for self. There is probably no 
human being who has not some interest in other people besides 
himself ; neither is there anyone who does not care more for 
himself than he does for other individuals outside a rather 
narrow family or neighborhood circle. 

The difference between a selfish and a benevolent person. 
As a matter of fact, the difference between a selfish and a 
benevolent person is one of degree. An extremely selfish 

1 See the author's " Essays in Social Justice," p. 60. Harvard University 
Press, 191 5. 



24 PRINCIPLES OF POLITICAL ECONOMY 

person is one who has an extreme preference for self as com- 
pared with others, and whose interest in other people does not 
extend beyond a rather narrow circle of relatives, friends, and 
neighbors. An extremely benevolent person is one who has 
only a mild preference for self as compared with others, whose 
interest in others extends to a rather wide circle of relatives, 
friends, neighbors, fellow citizens, and many other human 
beings, and who even includes some of the kindly animals in 
the circle of his care and protection. To prefer the satis- 
faction which the expenditure of a dollar on charity gives me 
to the satisfaction which it would give me in the gratification 
of my own palate does not mean that I have a deeper inter- 
rest in the receiver of my charity than I have in myself. If 
I spent the dollar upon myself, it might supply only a trifling 
need or gratify a mere whim or caprice, because I have spent 
so many other dollars on myself as to have supplied all my 
principal needs. But when it is spent in charity, it may 
supply a vital need of someone else. If I were in exactly as 
great need as he of the objects which my last dollar would pur- 
chase, and I then gave him my dollar, that would show that 
I appreciated his interest as highly as my own, or even more 
highly than my own. If there are a number of people in 
whom I am so deeply interested as to be willing to sacrifice 
myself even to a slight extent, I should pass for a fairly 
generous man. But while I am writing this I am fully con- 
scious of the fact that there are people in various parts of 
the world who are suffering from hunger, cold, and sickness. 
Yet I sit comfortably in my room instead of going out to 
find them and share my last dollar with them. They are so 
far away in space, or they are so far removed from myself in 
race, language, religion, or color that I cannot cudgel myself 
into caring as much for their comfort as I do for my own. If 
they were near neighbors, near relatives, I would take a deep 
interest in them. Will the reader ask himself if he is not in 
about the same condition > 



SELF-INTEREST 



25 



The way in which I appreciate an income for myself more 
than I appreciate an income for someone else may be illus- 
trated by means of the diagrams below : 




o 




D' 



■X 



Diagram A 

A's appreciation of his 

own income 



E E' 
Diagram B 
A's appreciation of B's 



E 



■X 



Diagram C 
A's appreciation of C's 



In Diagram A, let us measure the income of a certain man, 
whom we shall call A, along the line OX, and his appreciation 
of, or interest in, each dollar of his income, along the line OY. 
Thus, if his income is equal to the line OE, his interest in each 
dollar is measured, let us say, by the line DE. But as his income 
increases, each dollar becomes a matter of less consequence 
to him. He could spare it with less real sacrifice, because, 
having so many other dollars, he can still supply himself with 
all the necessaries of life and some unnecessary things besides. 
In other words, if we assume that his income increases from 
a quantity measured by the line OE to a quantity measured by 
the line OE' , then his interest in each dollar will decline from 
an intensity measured by the line DE to an intensity measured 
by D'E' . Another increase, say to the line 0E'\ would bring 
another fall in his appreciation, or interest, say to the line 
D"E" . From these assumptions we may derive the curve 
YDD'D" to indicate his appreciation of, or interest in, each 
dollar of his income. 

Another way of stating the case is as follows : Assuming 
that his income is measured by the line OE" , to give up one 
dollar of his income would cause him a sacrifice measured by the 
line D"E'' . He would merely have to give up some unimpor- 
tant luxury for which he does not care very much. If he were 
to keep on giving until there remained an amount measured 



26 PRINCIPLES OF POLITICAL ECONOMY 

by the line 0E\ he would have deprived himself of more and 
more important things, or of things for which he cared more 
and more. To give away still another dollar would cost him 
a sacrifice measured by the line D'E' . If now he keeps on 
giving until there is left only an amount equal to OE, he will 
be cutting so deeply into his own needs that each dollar given 
away would deprive him of something very important to his 
own well-being, and would occasion him a sacrifice measured 
by the line DE. 

Interest in those near to self. But this man has an inter- 
est in someone else and is genuinely desirous of seeing that 
other person comfortable and happy. In case that other person 
is peculiarly dear to him, his appreciation of that person's in- 
come might be quite as high as his appreciation of his own. 
In that case the same curve, YDD'D" in Diagram A, would 
represent his appreciation of the other person's income. But 
he will not feel so deep an interest in very many people. After 
you get beyond the members of his immediate family and a 
few intimate friends, if he is a generous man, and even before 
that if he is a selfish man, you will find people in whom he 
has no such intense interest. In this case his appreciation of 
the importance of an income to that other person will be 
represented by Diagram B. 

In Diagram B we will measure the income of the other 
person, whom we shall call B, along the line OX, and A's 
appreciation of B's income along the line OY. If B's income is 
very small, measured, let us say, by the line OE, A will desire 
to see that income increased. The intensity of that desire of 
A is measured, let us say, by the line BE. If now A's income 
is measured in Diagram A by the line OE'^, he will be willing 
to give up a part of his own income in order to add to B's 
income. The line DE in Diagram B is longer than the line 
I)"E" in Diagram A. 

This kind of giving is quite consistent with the fact that 
A cares a great deal more for himself than he does for B. 



SELF-INTEREST 27 

The relative height of the two curves YDD^D" in Diagram A 
and YDD' in Diagram B indicates the degree of preference 
for himself. Under the conditions represented in the two dia- 
grams, A will by no means divide evenly with B. That is to 
say, he will not cut his own income down from an amount 
measured by OE" to an amount measured by OE' in Diagram A, 
in order to increase B's income to an amount measured by OE' 
in Diagram B. That would give them equal incomes ; but A's 
enjoyment of the last dollar of B's enlarged income would be 
measured by the Hne D'E' in Diagram B, while if he had kept 
that dollar for himself, his enjoyment of it would have been 
measured by the line DE in Diagram A. 

Interest in others who are not so near to self. When it 
comes to some other person, whom we shall call C, who is so 
distantly removed from A in space or in kinship that A takes 
very little interest in him, we may find that A's interest is 
represented by the curve YD in Diagram C. Applying the 
same comparisons between Diagrams A and C that were made 
between Diagrams A and B, we shall find that A might give 
up a dollar to keep C from starvation, if C's condition were 
presented to him pretty strongly, but that is about as far as A 
will go in relieving C's distress. 

Under the conditions that we have described, A would pass 
as a very benevolent man. If he were what is ordinarily re- 
garded as a selfish man, the curves YDD' in Diagram B and 
YD in Diagram C would merely be somewhat lower than we 
have drawn them, or the curve YDD' D" in Diagram A would 
be higher than we have drawn it. 

Nearness in kinship. Even though a generous man will 
care a great deal for the interests of a great many other people, 
nevertheless he is somewhat self-centered in his appreciation 
of or interest in others. He will care more for some people 
than for others, — more, for example, for his own wife and 
children than for other men's wives and children, more for 
his own relatives than for other people's relatives, more for his 



28 PRINCIPLES OF POLITICAL ECONOMY 

own neighbors than for other people's neighbors, 'more for 
his own fellow citizens than for the citizens of other countries. 
Those for whom he cares most, or whose interests he feels 
most keenly, are those who are in some way closely associated 
with himself. They are near to him, if we may be per- 
mitted to use the word near in several senses besides the 
geometrical or geographical sense. They may be near to him 
in point of kinship. Thus, other things equal, he will be more 
generous toward his near of kin than toward those who are 
distantly related to him, toward human beings than toward 
animals, and more toward the higher than toward the lower 
animals. Again, mere geometrical nearness counts as a factor. 
A man who is suffering at his door or in his immediate 
neighborhood will move him more than a man who is suffer- 
ing equally but who is a long way off. This may sometimes 
be a stronger factor than nearness of kinship. That is, a near 
neighbor who needs help will appeal more powerfully to his 
sympathy than a near relative who lives a long way off. He 
may even do more for an animal with whom he is closely 
associated, such as a favorite horse, dog, or cat, than for some 
human being who is far away. Space is almost as important 
a factor as kinship in limiting his interests. 

Nearness in time as well as in space. Time is also a factor. 
Our generous man is more interested in his immediate chil- 
dren than in his distant descendants, more in his contemporary 
fellow citizens than in future generations. He is more interested 
even in his own present wants than in his future wants. ^ 

There are other senses than space, kinship, and time in 
which the word near can be used. There are those who 
are near in the sense of like-mindedness. They who think 
and feel on most important questions as he thinks and feels 
may be said to be near him in a very important sense. He is 
pretty certain to care more for them, other things equal, than 
for those who think and feel differently. This may sometimes 
1 Cf. Chapter XXXV, on The Source of Interest. 



SELF-INTEREST 



29 




prove so strong a tie as to cause him to desert not only his 
neighbors and fellow citizens, but even his family, in order to 
take sides with those who think and feel as he does. 

In short, a man's interest in others is limited by the factor 
of distance in space, time, or kinship, and in unlikeness, either 
physical, moral, or mental. The greater the distance which 
separates them from 
him in any or all 
of these respects, 
the less his interest 
in them tends to 
become ; while the 
nearer they are to 
him in any or all 
of these respects, 
the more intense his 
interest in them tends to become. He is thus self -centered in 
his appreciation of the interest of others even when he is 
broadly generous. When he is narrowly selfish, he is more 
narrowly self -centered. 

Self-centered appreciation. This principle of self-centered 
appreciation may be illustrated by the diagram above. 

Let us assume that the individual's appreciation of the 
interests of various persons, including himself, is measured 
along the line O Y. Then let us assume that he himself stands 
at the point Oy while others are ranged along the line OX in 
the order of their nearness to himself in some of the 
senses in which we have used the word nearness. Let us 
take kinship, for example. Those nearest of kin would stand 
on the line OX nearest to the point O^ and those most distantly 
related near the opposite end, or the point X. We will now 
let the curve SS^ represent the selfish man's appreciation of the 
interests of various persons. The line OS measures his appre- 
ciation of his own interest, or his interest in himself. His 
appreciation of tjie interests of another person is measured by 



30 PRINCIPLES OF POLITICAL ECONOMY 

the perpendicular distance from the point on the hne OX where 
that person stands to a point on the hne SS^ . Thus his appre- 
ciation of the interests of his immediate family may be almost 
as high as his appreciation of his own interest. But he cares 
so little for other people, and those for whom he cares even 
a little are so few in number, that the curve SS^ falls very 
rapidly. Distant relatives who stand beyond the point S^ on 
the line OX do not concern him in the slightest degree. He 
has no appreciation at all of their interests. 

In the case of G, who is a generous man, the curve is 
different. It is represented by the curve GG^ . Following the 
same explanation as was given of the curve SS\ we find that 
the curve GG^ represents him as caring a little more for a very 
few persons than for himself. Then his interest in others 
begins to decline the farther they are from himself, until, when 
we find some who are so far removed as to stand beyond the 
point G^ on the line OX, his interest in them disappears 
altogether. 

Any being who did not show such preferences as these 
would scarcely be human. He who would not sacrifice a trifle 
even to save the life of his nearest of kin, or his nearest 
neighbor, would not be a man but a devil. Again, he who 
would not show more interest in his near of kin than in his 
distant of kin, in his near neighbors than in his distant 
neighbors, in his fellow citizens than in the citizens of other 
countries, in kindly disposed men than in evil-minded men, 
in men than in animals, or in the higher than in the lower 
animals, would not be much better than a devil. If, in a strug- 
gle between a man and a tiger or a man and a disease germ, 
he did not show some disposition to favor the man, or if in 
the struggle between a good man and a criminal he did not 
show a preference for the good man, we should probably call 
him by some pretty hard names. Zeus alone among the gods 
has been represented to us as showing no preference for 
either the Greeks or the Trojans in their memorable struggle. 



SELF-INTEREST 31 

All the lesser gods showed preference and took sides, but he 
maintained an attitude of supreme indifference to the petty 
quarrels of mortal men. If you will try to appraise his morals, 
you may find some difficulty in deciding whether they were 
godlike or devilish. They certainly were not human. 

Does it work well to be self-centered ? We come now to the 
second of the questions stated at the beginning of this chapter. 
Does it work well or badly for the individual to show self- 
interest or to be self-centered in his appreciation of human 
interests .? No one is likely to deny that he should show a 
preference for hum.an beings as compared with other creatures. 
We hear a few vague suggestions now and then to the effect 
that each one should be a friend to man and that he should 
not show preference for special groups or classes of men. 
Aside from the vagueness of the idea of friendship to man 
there are one or two difficulties. Suppose you found a person 
who was not a friend but an enemy to man, should you befriend 
him or not ? If you befriend an enemy of man, are you your- 
self a very good friend to man ? In order to befriend man 
must you not be an enemy to the enemies of man ? If so, 
you must discriminate and show a preference for the friends 
of man as against the enemies of man. In other words, you 
must divide men into at least two classes, namely, the friends 
and the enemies of man, and show more regard for and 
interest in one class than in the other. In the case of the 
average individual these classes resolve themselves into those 
whom he approves, on the one hand, and those whom he 
disapproves, on the other. If he is wise in his approvals and 
disapprovals, this will probably work well. He lends his 
encouragement and strength to those who pass it on, — who 
use the strength which they receive from his friendship in 
doing good rather than evil. Thus the giver does more good 
than he would if he gave his encouragement and strength to 
evil men and good men alike. He should show at least that 
degree of preference for some men as against others. 



32 PRINCIPLES OF POLITICAL ECONOMY 

Preferring some people to others. But, granting that one 
may be justified in showing a preference for good as compared 
with bad men, is one justified in showing a preference either 
for himself or for those who are near to him in any of the 
senses which we have been discussing, that is, for his family 
or his neighbors as compared with others outside those circles ? 
There is something to be said in the affirmative, provided the 
preferences are not too extreme. Volumes have been written 
on this and similar problems, and doubtless many more will 
be written. The affirmative argument may be briefly stated in 
the form of a series of propositions : 

1. Who ought to look after and safeguard each interest f 
Every interest ought to be safeguarded and provided for by 
the person who can do so most effectively. National or social 
welfare consists in the most complete satisfaction of all the 
interests of all the people. The more fully and completely 
every interest is safeguarded and provided for, the greater the 
prosperity and welfare of the whole group. Therefore, when 
each and every interest is looked after by that particular per- 
son who can look after it most thoroughly and successfully, 
the social welfare will be greater than it would be if some 
interests were looked after by persons who were not best 
fitted to do so. 

2. Generally speaking, but with a few exceptions, each and 
every interest can be safeguarded and looked after by that 
person who knows and understands it most intimately. Jones 
probably knows his own interests better than he knows those 
of Smith. If so, he can usually look after his own interests 
more effectively than he can attend to those of Smith. Like- 
wise, and for the same reasons. Smith can look after his own 
interests better than he can those of Jones. Under these cir- 
cumstances the interests of both Jones and Smith will be 
looked after better if each looks after his own than if each 
looked after the other's. However, there may be exceptions 
to this rule. Jones may know his own interests better than 



SELF-INTEREST 33 

Smith, but may be in some unfortunate condition which 
renders him unable to look after them. In such a case, even 
though Jones does know his own interests better than Smith, 
Smith may nevertheless be able to look after them better than 
Jones can. In such a case it would promote the prosperity of 
that community of two if Smith would spend a part of his 
time looking after Jones's interests. However, as soon as 
Jones recovers from his incapacity, it will be better for both 
if they return to their normal habits and each looks after 
his own interests. 

3. Who knows each interest most completely? Generally 
speaking, but with a few exceptions, the individual of mature 
years and sound mind knows his own interests more intimately 
than other people know them, and also more intimately than 
he knows the interests of other people. Young children, of 
course, do not know their interests as well as these are known 
by their elders ; nor do persons of unsound mind know their 
interests as well as these are known by individuals of sound 
mind. Occasionally a mature person of sound mind may be 
mistaken in his judgment as to his own interests, and some 
exceptionally wise friends may know them better than the 
person himself does. In all these cases there are excellent 
reasons why wiser persons should take a great deal of interest 
in the affairs of those less wise than they ; but it is well not to 
be too hasty in assuming that you are wise enough to look 
after the interests of a mature person of sound mind better 
than he can do it himself. 

4. Generally speaking, but with a few exceptions, the 
individual knows the interests of his near of kin better than 
he knows those of his distant of kin, of his fellow citizens 
better than those of citizens of other countries, of members of 
his own race better than of members of other races. He is in 
much more intimate contact with the members of his immediate 
family than with others, and, even aside from all questions 
of affection, he can gauge their desires and understand their 



34 PRINCIPLES OF POLITICAL ECONOMY 

needs better than he can the desires and needs of those with 
whom he is not so intimately associated. That is a sufficient 
reason why, in the economy of nature, he should care more for 
them than for others. If he were driven by his affections to try 
to care for those whom he did not understand, while neglecting 
those whom he did understand, he would bungle much more 
than he does. Therefore nature is wise in so ordering things 
that affection and understanding normally go together. 

5. Generally speaking, but with a few exceptions, the indi- 
vidual knows the interests of his near neighbors more inti- 
mately than he knows those of his distant neighbors. Here 
again it is a wise provision that friendship and understanding 
go together. 

6. Whom can we reach with the least waste of energy? 
Generally speaking, but with a few exceptions, the individual 
can reach his near neighbors with less effort and waste of 
energy than he can reach his distant neighbors. It is wise, 
again, that neighborly feeling develops where there is the most 
power to help. If each man neglected his near neighbors and 
attempted to look after his distant neighbors, while their near 
neighbors in turn neglected them and tried to look after their 
distant neighbors, there would be much working at cross pur- 
poses, and much energy would be wasted because each tried 
to do that which he was not well situated for doing, while 
neglecting the work which he was well situated for doing. 

In conclusion, it is pretty clear that, as a general rule, a 
community in which each individual works effectively, looking 
after those interests which he can look after most success- 
fully and with least waste of effort, is better than one in 
which each individual works ineffectively, trying to look after 
interests which he can look after less successfully and with 
greater waste of effort. Since each individual knows his own 
interests and the interests of those nearest him better than he 
knows the interests of those farther away, we must justify at 
least a moderate amount of self-preference, or self-centered 



SELF-INTEREST 35 

appreciation of the interests of others. But it is difficult to 
tell just how far this rule should be carried. When communi- 
cation and transportation were very difficult, the obstacles in 
the way of helping people who were a long way off would 
have made it very wasteful to try to do very much for them. 
Only one's near neighbors could be helped effectively ; and 
other people outside that circle had to be left to their near 
neighbors, if they could not look after themselves. Now that 
the obstacle of distance is not so great, it would seem to be 
economical to widen one's geographical neighborhood somewhat. 
Harnessing self-interest to public uses. Law and govern- 
ment can do little or nothing toward eliminating self-interest, 
even if it were desirable to do so, which it is not ; but it is 
possible to harness it to the good of the nation. Assuming 
that a man will try hard to promote his own interests and the 
interests of those nearest to him, it is only necessary to confine 
his efforts to the field of usefulness or productivity. If he is 
never allowed to rob, steal, or do any injurious act in trying 
to promote his own interest, but is told that he will be per- 
mitted to do anything useful and receive pay for it, or to pro- 
duce some desirable product and sell it, he will then have a very 
strong reason for doing useful things or producing desirable 
objects. If a desirable object is produced, not because the pro- 
ducer has a benevolent interest in the consumer, but because 
he has a selfish interest in the price which he can get for it, 
it will do the consumer just as much good as though it were 
produced for benevolent reasons. When everyone is driven 
by self-interest to produce as much as he can or render as 
good service as he can, there will be a great deal produced 
and much good service rendered. Therefore, even if one did 
not approve of any degree of self-interest whatever, one might 
consistently admit that the law was m^aking the very best of a 
bad situation by thus harnessing that powerful motive to use- 
ful service and productive work. Seeing that the law could 
not possibly transform self-interested persons into benevolent 



36 PRINCIPLES OF POLITICAL ECONOMY 

persons, the next best thing would certainly be to hedge them 
about so as to make it impossible for them to pursue their own 
self-interest in any except useful and productive lines. 

No visible harmony of human interests. This does not 
assume that there is any such thing as a natural harmony of 
human interests. If anything is clear, it is that human inter- 
ests are frequently in conflict. Unless there is an umpire or 
a tribunal to decide these questions of conflict, an overdevel- 
oped self-interest will frequently drive men into actual con- 
flict, or lead one to do something in his own interest which 
would be injurious to others. It is one of the functions of law 
and government to adjudicate these conflicts, and also to for- 
bid, with suitable penalties, any injurious act. When the laws 
are intelligently framed and rigidly executed, this leaves the 
individual no choice. However self-interested he may be, and 
however indifferent he may be to the interests of others, he 
must seek his self-interest by useful rather than by injurious 
acts. When he is thus efficiently controlled, the more intense 
his self-interest becomes, and the more intense his interest in 
his family or near friends, the more intensely he will strive to 
do useful things, not because he wants to be useful, but because 
he wants the reward of usefulness. To harness this powerful 
motive of self-interest to the kinds of work which benefit the 
nation — which increase wealth and prosperity — is like har- 
nessing a great natural force like steam or electricity. In the 
one case the harness consists of laws and regulations ; in the 
other it consists of mechanical devices. 



CHAPTER IV 



COMPETITION 



The struggle for existence. It is a common error to speak 
of competition as though it were synonymous with war or with 
the struggle for existence as it is carried on among brutes. 
That it is a form of conflict there can be no doubt, nor can 
it be denied that it is a phase of the all-but-universal struggle for 
existence? But there are many forms of conflict besides war, 
and there are many ways of struggling for existence without 
resorting to the destructive methods of brutes. The forms of 
conflict, or the mxcthods of struggling for existence, may be 

classified as follows : 

War 

Robbery 

Dueling 

Sabotage 

Brawling 

Thieving 
Swindling 

Adulteration of goods 
False advertising 



Methods of 
Struggling 

FOR 

Existence 



Destructive - 



Deceptive 



Persuasive < 



( Courting for royal favors 
Political \ Courting the sovereign people 
[ Campaigning for office 

[ PoUte social intercourse 
\ Courting 



Erotic 



f Advertising 
C°""™'='°^' I Salesmanship 

J " Leaving it to the crowd " 
Judicial I L-^-g^^iQj^ bgfoj-e courts 

( Rivalry in producing goods 
Productive | ^^^^^^.^ -^^ rendering service 

37 



38 PRINCIPLES OF POLITICAL ECONOMY 

Various forms of conflict. The methods named in the fore- 
going outHne may be explained and illustrated as follows : 
By destructive methods are meant all those whereby one suc- 
ceeds by virtue of one's power to kill, to hurt, or to inspire 
fear of physical injury or pain. War, robbe7y, dueling, sabo- 
tage, and brawling are names for methods of destruction as 
carried on by human beings ; but it must be remembered 
that animals also kill, rob, inflict injury, and inspire terror. 
By the deceptive methods are meant all those by which one 
succeeds by virtue of one's power to deceive, to swindle, or to 
cheat. Animals practice deceit, though we do not call their 
forms of deceit by such names as swindling, coimterfeiting, 
adulteration of goods, etc. By the persuasive methods are 
meant all those methods whereby one succeeds by virtue of 
one's power to persuade or to convince. One may beat one's 
rival by being a more persuasive talker, whether one is striv- 
ing for favors from the sovereign person or from the sover- 
eign people, whether one is striving for the hand of a lady, 
the decision of a jury, or the trade of a possible customer. 
This form of conflict would remain even if we could elimi- 
nate all other forms. Even under the most complete form of 
communism there would remain abundant room for the per- 
suasive forms of conflict. By the productive methods are 
meant all those methods whereby one may beat one's rivals, 
or gain advantages, by virtue of one's power to produce, to 
serve, or to confer benefit. 

The same persons may resort to more than one of these 
methods in order to gain an advantage. When two farmers 
compete in growing crops, they are struggling for existence, or 
for economic advantage, by a productive method. When they 
quarrel over a line fence and take their quarrel before a court 
for adjudication, they are struggling by a persuasive method. 
When they secretly alter or remove landm^arks in order to gain 
an advantage in their litigation, or when they bribe jurors, they 
are struggling by a deceptive method. When they fall to 



COMPETITION 39 

fighting either with fists or with weapons, they are strugghng by 
a destructive method. When they change their methods in the 
order just described, they are sinking lower and lower in the 
scale ; that is, they are resorting to worse and w^orse methods 
of struggling for existence or advantage. When they rival one 
another in growing corn, there is more corn grown as the result 
of that rivalry. The country is better fed and everyone is 
better off, except possibly the one who is beaten, and even 
he may very likely be better off than he would have been if 
he had not competed at all. When two farmers quarrel over 
a line fence and take it into court, no one gains any benefit 
except the lawyers, and what the lawyers gain the litigants 
lose. No new land is created by that conflict. No new wealth 
is produced. The community is no better fed, and the liti- 
gants have wasted their time. To change from persuasion to 
deception, or from deception to physical force, is so clearly 
to sink to a lower level that it is unnecessary to pursue the 
topic farther. 

Destructive and deceptive methods of brutes. It will be 
apparent to anyone who will study the diagram that among 
animals the destructive and deceptive methods are the charac- 
teristic forms of struggle. They kill, maim, injure, rob, and 
deceive one another with no moral or legal restraints. They 
may sometimes rise to the level of persuasion, as in the 
courting process, but never to the level of production ; that 
is, no animal ever tries to beat its rival by producing a larger 
or better product or rendering a greater or better service. 
Among human beings who have no moral sense, and who are 
unrestrained by law and justice, the destructive and deceptive 
methods of struggle will be followed, as well as the persuasive 
and productive methods ; but the destructive and deceptive 
methods are precisely the things that morals and laws are de- 
signed to prevent. In any civilization worthy of the name, 
and under any government worthy to stand overnight, men 
are actually restrained by their own moral feelings, by the 



40 PRINCIPLES OF POLITICAL ECONOMY 

respect for the good opinions of their fellows, and by the 
fear of legal penalties, from attempting to promote their own 
interests by destruction or deception. 

Meaning of crime. To say that men are restrained from 
doing these things is not the same as to say that they are 
absolutely prevented. Crime still flourishes, but it must be 
remembered that what we call crimes for human beings are 
not crimes for brutes, for the simple reason that brutes have 
none of those restraints which men throw around themselves. 
The fact that we call all destructive methods, and the more 
grossly deceptive methods, crimes, and impose penalties against 
them, shows that we are trying to raise the struggle for ex- 
istence to a higher plane than that on which it is waged in 
the subhuman world. The aim is to prevent destruction and 
deception, and to compel men to succeed, if they succeed at 
all, by persuasion or production. No government, however, is 
so efficient that it can prevent all destruction or deception. 
''The mills of man grind slowly and they grind exceeding 
coa7'se!' Besides, there are some more or less refined methods 
of deception which have not even been declared illegal by 
legislation. If we can so improve our legislation as to pro- 
hibit every form of deception as well as destruction, and if 
we can so improve our executive and judicial systems as to 
prevent absolutely the violation of law, we §hall have reached 
the ideal of government control over the struggle for existence. 
To stop productive competition and compel us all to struggle 
for our own advantage by the persuasive methods would be a 
distinct step backward. 

Is it wrong to compete? There are a few people who object 
on principle to all forms of competition, — who believe that 
the whole competitive system is morally wrong. This feeling, 
however, is probably due to a failure to discriminate, as we 
have tried to do in the preceding pages, between different kinds 
of conflict. The horrors of war and other forms of destructive 
conflict, the petty, skulking meanness which accompanies all 



COMPETITION ■ 41 

forms of deceptive conflict, and even the jealousies and heart- 
burnings which result from many forms of persuasive conflict, 
have so impressed certain sensitive spirits as to cause them to 
revolt against the very idea of competition in any form. Such 
people ought never to play croquet, because there is com- 
petition even there. An election is as truly competitive as any 
form of business. 

Universality of struggle. During the entire life of man on 
this planet he has had to struggle in one way or another. 
The reason why we are here to-day is because our ancestors 
were successful in their struggles. They succeeded in living 
and reproducing their kind in spite of all the enemies and 
dangers which surrounded them. One reason why they strug- 
gled so successfully was that they were valiant enough to wage 
their fight with vigor and with spirit. That spirit we have in- 
herited to such an extent that we cannot even amuse ourselves 
without some kind of competition or struggle. It is as the 
breath of life to our nostrils. It will be well for us if we can 
harness this spirit to productive work rather than allow it to 
waste itself in destruction, deception, or even in some fruitless 
kinds of persuasion. The nation which succeeds best in so har- 
nessing this spirit to production is the nation which should 
normally grow rapidly in wealth, prosperity, and power. 

Again, the great fact of scarcity, together with the fact, 
pointed out in the preceding chapter, that we all prefer some 
people to others, makes some form of competition inevitable 
and eternal. As pointed out in Chapter II, when there is 
not enough of a certain thing to go around and satisfy every- 
body, all those who prefer themselves and their own families 
to their rivals and their families will struggle to get their share 
of the scarce article. When there are not enough of the high 
offices to go round, there will be a similar struggle to get them. 
These facts have always been present in human society and 
always must remain, from the very nature of man and of the 
universe in which he finds himself. From the very nature of 



42 PRINCIPLES OF POLITICAL ECONOMY 

the case we cannot all be leaders. If we were, there would 
be no followers. We would all rather lead than follow ; we 
would rather command than obey. Therefore we shall always 
struggle for leadership and command. Nor can there be wealth 
enough to go around and satisfy everyone. If there were, 
wealth would cease to exist as wealth. Whenever you find 
a thing so abundant as that, it has ceased to count as wealth. 
Only those things are wealth of which we can say that more 
is better than less. So long as we would rather have more 
of a certain article than less of it, we shall strive to get 
more. Competition, or struggle, is therefore unavoidable. The 
thing to do is to make the most of it and to turn it, so far as 
possible, into productive channels and out of the destructive 
and deceptive channels. 

The spirit in which one competes. In assuming the uni- 
versality and permanence of competition in some form it is 
not necessary to exclude such things as love, friendship, 
neighborliness, and cooperation. Competitors in a friendly 
game may be none the less friendly because they are com- 
peting. It is only when they care more for victory or the 
prize of victory than they do for friendship that there is any 
conflict between competition and friendship. The cure for 
this, however, is not the abolition of competition, but the 
learning to care for the right things and to evaluate things 
properly. When men care more for money, w^hich is the 
immediate prize of economic competition than for honor, 
friendship, or justice, then competition is likely to be ruthless 
and destructive. When men care more for offices, the imme- 
diate prize of political competition, than for the welfare of the 
country or the peace of the neighborhood, a political cam- 
paign is likely to become a ruthless and destructive game. 
And when football men care more for victory than for sport 
or honor, football becomes a game unfit for gentlemen. In all 
these cases the evil does not inhere in competition itself but in 
the false system of valuations in the minds of the competitors. 



COMPETITION 43 

So long as business men realize that there are other things 
more precious than money, so long as politicians realize that 
there are other things more important than winning offices, so 
long as football men realize that there are other things greater 
than victory, all these forms of competition are thoroughly 
compatible with the most sincere friendship. 

It has been pointed out many times that the struggle for 
the life of others is just as real a fact in life as the struggle 
for the life of self, that mutual aid is as real as mutual 
antagonism, and that cooperation has a place in our economic 
system as well as competition. All this is true, but it must 
not be allowed to obscure the fact that competition is a very 
real thing also. Back of these apparent contradictions lies the 
very important fact that human interests are sometimes har- 
monious, and sometimes antagonistic, — that they are never 
wholly one or the other. Where the interests of men har- 
monize, there is and always will be cooperation, provided they 
are wise enough to understand it ; where their interests 
conflict, there is and always will be competition. 

Cooperation a form of competition. Even cooperation, as it 
is generally practiced, is only a method of competing more 
effectively. There is cooperation among the members of an 
athletic team. Their teamwork consists in working together 
smoothly and effectively, but the purpose of this teamwork, 
or cooperation, is to enable them to compete more effectively 
against the opposing team. It would be difficult to find or to 
name an instance of cooperation which did not, directly or in- 
directly, enable the cooperators to compete more successfully 
than they were able to do when working alone as individuals. 
It is really the principle of teamwork applied to business 
competition. Within the cooperating group, as within the 
athletic team, competition among members is reduced. But com- 
petition between cooperating groups, or between the group and 
those outside the group, is quite as sharp as it would be if 
there were no cooperative groups. Again, when a cooperative 



44 PRINCIPLES OF POLITICAL ECONOMY 

group becomes large, there arises within the group a certain 
amount of competition for offices and other advantages. 

Cooperation is an excellent thing under certain conditions, 
and wherever the conditions call for it, every reasonable effort 
should be made to encourage it ; but the encouragement should 
be given with a full understanding of its limitations and of its 
real relation to the competitive process. More cooperative 
societies have failed than have succeeded. One of the principal 
reasons for failure has been that the promoters have imagined 
that there was in cooperation something inherently superior to 
competition, and that it ought to be substituted for competition 
anywhere and everywhere. The truth seems to be that coopera- 
tion is called for only under certain special conditions where 
teamwork is required in order to secure large results. 

Where cooperation is successful. A careful study of coopera- 
tion will show that it has seldom succeeded in the field of 
production. Its chief successes have been achieved in mer- 
chandizing, that is, in buying and selling. Except among a 
few religious societies, which are held together by a powerful 
religious sentiment, the author does not know of a single case 
where cooperative farming has succeeded. By cooperative 
farming is meant the running of the productive work of grow- 
ing crops under a cooperative system. There are many cases, 
however, in which groups of farmers have cooperated in buy- 
ing and selling, in marketing their products, in purchasing 
their supplies, and in securing capital on advantageous terms. 
There are also many cases in which they have cooperated 
in running creameries, cheese factories, and grain elevators. 
These are parts of their marketing system. Again, it must be 
remembered that the farmers do not themselves operate these 
establishments. They own them and they furnish the capital 
to run them, but they hire others to manage them and to do 
the work. The men who work in these establishments are not 
cooperators, but receive wages and salaries precisely as they 
would if the establishments were owned by private individuals. 



COMPETITION 45 

Two fields for business competition. There is a fundamental 
reason why cooperative enterprises have not flourished in the 
field of production as often as they have in the field of buy- 
ing and selling. This reason is found in the two kinds of 
business competition, — competitive production and competitive 
bargaining. Competitive production always works well ; com- 
petitive bargaining sometimes works well and sometimes works 
badly. Since competitive production always works well, the 
need for cooperative production is never sufficient to justify its 
existence. No one has a sufficiently strong motive to induce 
him to give his time and energy to the running of a coop- 
erative society in the field of production. Since there are 
no evils connected with competitive production, there is not 
enough to be gained by cooperative production to lead anyone 
to sacrifice his time and effort in order to make it succeed. 

In the field of competitive bargaining, however, evils fre- 
quently spring up. Where a small and compact body of 
dealers are buying from a large and widely scattered body of 
producers, the latter are at a great disadvantage in the bar- 
gaining process. Where this is the case it is necessary for 
the producers to get together in a cooperative organization in 
order to bargain on equal terms with 'the dealers. Where there 
is such a need as this, someone will have a motive that is 
sufficiently strong to induce him to give his time and atten- 
tion, to sit up nights, to labor in season and out of season, 
to keep the cooperative society together and make it succeed. 
Without some such motive as this, cooperation has seldom 
or never succeeded. 

Competitive consumption. There is another kind of com- 
petition which always works badly. It is even worse than 
competitive bargaining. It may be called competitive con- 
sumption. By competitive consumption is meant a rivalry in 
display, in ostentation, in the effort to outshine or to outdress 
all one's neighbors, or at least not to be outshone or out- 
dressed by them. This is not business competition, however, 



46 PRINCIPLES OF POLITICAL ECONOMY 

though it can be called a kind of economic competition. 
Seeing that this is the worst form of competition, — a kind 
which always works badly, — it would follow that the best kind 
of cooperation would be a kind which would stop this process 
of conspicuous waste and display. A few religious sects have 
undertaken to do something in this direction, but they have 
not been very popular. Vanity is apparently an even stronger 
motive than greed itself. It is greed which leads to the worst 
evils of competitive bargaining ; it is vanity which leads to the 
worst evils of competitive consumption. 

From what has been said it will appear that economic com- 
petition is not synonymous with the productive methods of 
struggling for existence as outlined in the beginning of this 
chapter. There is such a thing, it is true, as competitive pro- 
duction, but competitive bargaining is partly persuasive and 
partly deceptive. It is persuasive when it takes the form of 
clever advertising, of expert salesmanship, or of shrewd and 
reasonably honest bargaining; it is deceptive when cleverness 
in advertising takes the form of artistic lying (of overstating 
the merits of an article advertised), or when expert salesman- 
ship takes the same form. Competitive consumption has no 
productive features about' it. The effort to keep up appear- 
ances, to dress better than one can afford, to spend money for 
purposes of display, are all deceptive, besides being wasteful 
and to that extent destructive. These, however, are among 
the more refined and less repulsive forms of destruction. For 
this reason, perhaps, neither law nor public sentiment has 
condemned them very definitely as yet. 

In what fields cooperation may succeed. They who are 
interested in promoting cooperation should bear all this in 
mind. It is a waste of time and energy to try to substitute 
cooperation for competition in all cases. In the first place, it 
cannot be done, because, so long as people prefer themselves 
and those who are near them to others who are farther from 
them, competition in some form will exist. In the second 



COMPETITION 47 

place, even if cooperation could be substituted for competition, 
it would be undesirable in many cases, though desirable in 
others ; that is to say, there are some cases in which competi- 
tion works so well that cooperation could not improve upon it. 
To be more specific, competitive production, as stated before, 
always works well. No one has yet succeeded in making coop- 
eration in production, either on a large scale or on a small scale, 
work successfully for a long period of time. This is not saying 
that producers may not occasionally cooperate, as when farmers 
help one another in special lines of work. In our rural com- 
munities, especially in previous generations, there were many 
barn raisings, log rollings, corn huskings, and other examples 
of genuine and beneficial cooperation. But these events were 
only incidents in a kind of life which remained, in spite of 
them, predominantly competitive. Even competitive bargaining 
sometimes works well. Where this is the case, nothing is to 
be gained by cooperation, and it is therefore certain to fail, 
because the cooperators will sooner or later lose their enthu- 
siasm, when they see that they are not gaining anything by it, 
that is, when they see that it is not working any better than 
competition. The would-be cooperators should choose for their 
field of effort some situation where competitive bargaining is 
working badly. There they will have a chance of success. 
But no cooperative scheme runs itself. Even where there is 
a distinct and undoubted need for it, it will succeed only 
when some capable person gives a great deal of time and 
study and hard work to it. 

Compulsion versus voluntary agreement. With an unerring 
instinct for economic falsehood a certain class of writers have 
persistently obscured this question of cooperation versus com- 
petition by confusing it with working under compulsion ver- 
sus working under freedom of contract. The Panama Canal 
was not built cooperatively. The government of the United 
States decided to hire others to do it instead of bargaining 
with contractors. They who did the work did not cooperate, 



48 PRINCIPLES OF POLITICAL ECONOMY 

any more than the men who build our railroads and factories 
or work on our streets. If a large number of farmers unite 
to run a creamery or a shoe factory of their own, but do 
not work in it themselves, they sometimes call it a coopera- 
tive creamery or shoe factory. In reality it is only quasi coop- 
erative. The people who do the work in the factory are 
hired and have no more to say about the management than 
they would have if the factory were owned by an ordinary 
joint-stock corporation. A cooperative shoe factory, of the 
class which we are now discussing, is merely an organization 
formed for the purpose of bargaining for its shoes more suc- 
cessfully than it could otherwise do. It finds that it can bar- 
gain directly with workingmen, tanneries, and others to better 
advantage than it can bargain with private owners of shoe 
factories. That is the way in which the Panama Canal was 
built. It was found that the government could bargain more 
successfully with the engineers, directors, and workingmen than 
with private contractors. It was as if a private citizen who 
was about to build a house should decide to hire his own 
workmen and foremen instead of bargaining with a contractor. 

It is particularly erroneous to speak of an army as though 
it were a cooperative body. It works under authority and 
compulsion rather than under a system of free contracting. 
Soldiers do whatever they are commanded to do and not what- 
ever they see fit to bargain to do. Experience has shown that 
armies can succeed in no other way. It has also shown that 
industry can succeed on the basis of free contract, under which 
no one does anything until he sees fit to contract to do so. 
A little military experience will thoroughly convince our people 
that the distinction between compulsion and freedom is not the 
same as the distinction between cooperation and competition. 

Cooperation in setting standards of consumption. There is 
always an acute need for a kind of cooperation that can stop 
competitive consumption. Unfortunately that need is not very 
widely understood. One reason why it costs us so much to 



COMPETITION 49 

live is that we are everlastingly trying to keep up with some- 
one else. '' It takes all my income," said a certain congressman, 
''to keep up with my fool neighbors." He was expressing 
in this picturesque manner one of the profound facts of our 
economic life.^ The things which cost us so much money are 
not the things which we prize for their own sakes, but the 
things which we feel that we must have because our neighbors 
have them. We are, each of us, trying to live up to a stand- 
ard set by someone else. Rich and poor alike are afflicted by 
the same disease. The rich are doubtless more to blame than 
the poor, but the poor cannot escape all blame. If they would 
try to live rationally, and not try to keep pace with someone 
else a little richer than themselves, they would not find it so 
hard to make both ends meet. A little cooperation among 
themselves, in the way of setting their own standards of dress 
and fashion, would be a great help. If, likewise, the well-to-do 
would not try to imitate those still richer, they could be saved 
much worry and vexation of spirit. The individual finds him- 
self almost helpless. '' As well be out of the world as out of 
style " is a saying which pretty well sums up the situation, so 
far as the individual is concerned. But a large group of people 
who would cooperate in the work of setting their own styles 
need not be either out of style or out of the world. Educated 
people who see the principle involved should take the lead. 
In so doing they would not only be doing themselves a favor, 
but they would be conferring a priceless benefit upon the 
whole nation. 

1 Compare also Mr, Irving Bacheller's book entitled " Keeping up with 
Lizzie." 



CHAPTER V 

LAW AND GOVERNMENT 

The need for law. Law and government have a most im- 
portant part to perform in promoting the prosperity of the 
people. Bagehot^ has said that the first great need of primi- 
tive man is for law, — definite, concise law. He even argued 
that it is more important that the law be definite and concise 
than that it be just, though both are of very great importance. 
It is probable that a system of laws which are well understood 
because they are clear and concise, and which are regularly 
enforced without variation or favoritism, even though they are 
in some respects unjust, is better for a people than a system 
of laws which are in essence just, but which are not clearly 
understood and not regularly and impartially enforced ; but of 
course it would be still better if they were both just, on the 
one hand, and clear, concise, and regularly enforced, on the 
other. When everyone knows definitely what the law is, and 
knows definitely that it will be enforced not only against him 
but equally in his defense, he at least knows what he can 
count upon. Nothing so discourages industry and enterprise 
as uncertainty as to what other men are likely to do, and 
uncertainty as to the enforcement of law contributes to that 
uncertainty as to what other men are likely to do. 

The problem as to what the government can do, through its 
laws and its administration, for the promotion of the economic 
prosperity of the people, is of the very greatest importance. 
The specific aim should be to call out the very best and most 
productive efforts of every individual. Since the greatest re- 
source of any nation is the productive energy of the people 

1 Physics and Politics, fifth edition, p. 21. London, 1879. 
50 



LAW AND GOVERNMENT 51 

themselves, it follows that the conservation and development 
of that productive energy is the most constructive policy that 
any government can pursue. It also follows that the worst 
form of waste that any government could permit or encourage 
would be the waste of the productive energy of the people. 

The repression of destructive and deceptive action. The first 
and most obvious thing vv^hich the government must do is to 
prohibit and prevent all the destructive and deceptive forms 
of conflict as outlined at the beginning of the last chapter. 
It is of the utmost importance that this shall be accomplished ; 
and, what is equally important in determining the duty of the 
government, law and government are the only agencies which 
can accomplish it. He who has no moral scruples against pur- 
suing his selfish interests by destructive or deceptive methods 
can be restrained only by the superior force of the many as 
it is exercised through the government. If he is allowed to 
pursue his selfish interests by these methods, he not only 
wastes his own powers in unproductive efforts but also tends 
to destroy the products of other people ; and, what is more 
important, he discourages them from further productive effort, 
and thus causes their productive powers to go to waste. It may 
therefore be said that, whatever other functions government 
may have, its primary function is to repress the destructive 
and deceptive methods of pursuing self-interest. 

The first effect of this repression of the destructive and 
deceptive methods is to transform the struggle for self-interest 
from the brutal struggle for existence, where the strong prey 
upon the weak and the ferocious upon the gentle, into a 
struggle wherein the persuasive and the productive triumph 
over the unpersuasive and the unproductive. If it were possible 
(and it probably is) to carry this repression still farther, and 
not only to eliminate all destruction and deception but also 
to eliminate from persuasion all demagogy, all appeal to passion, 
everything in fact except the appeal to reason and justice, then 
it would be literally true that reason would everywhere trium.ph 



52 PRINCIPLES OF POLITICAL ECONOMY 

over unreason, justice over injustice, usefulness over useless- 
ness, and productiveness over unproductiveness. Under such 
a government each and every one would succeed in getting 
what he wanted in exact proportion as he contributed to others 
what they wanted ; the most useful would be the most success- 
ful, and the indispensable man would be the great man. In 
that situation we should have a literal fulfillment of the words, 
''Whosoever will be chief among you, let him be your serv- 
ant." And a servant is not necessarily one who comes at your 
beck and call to do your bidding ; he may be merely the one 
who does you a service or who produces what you need. 

Nothing could be more favorable to the prosperity of a 
nation than a general following of such a rule. If we could 
conceive of a nation in which no one could gain anything 
except by producing an equivalent or by contributing an equal 
amount to the prosperity of someone else, then the more 
ardently everyone strove to better his own condition, the more 
ardently would he be striving to better the condition of some- 
one else, driven thereto not by benevolence or philanthropy, 
but by self-interest. Then the more people there were striving 
to acquire wealth, the more there would be striving to produce 
it ; and the more ardently they desired to acquire it, the more 
ardently they would labor to produce it. Such a nation would 
certainly prosper out of all proportion to a nation in^which 
destructive and deceptive methods were practiced by a large 
proportion of its people. 

Two ways of promoting the productive life. There are 
two conceiveable methods by which such an ideal might be 
realized. One is such a perfection of the moral nature of 
every person in the nation as to make him unwilling to gain 
anything without producing it or its equivalent or rendering 
a service of equivalent value. The other is such perfection of 
law and government as to make it impossible for anyone, how- 
ever much he desired to do so, to gain anything without pro- 
ducing it or its equivalent or rendering an equivalent service. 



LAW AND GOVERNMENT 53 

In neither case would it be necessary for men to cease caring 
more for themselves and their own families and neighbors 
than for other men and their families and neighbors. In 
neither case would it be necessary to do away with competition, 
or the struggle for individual gain. It would only be neces- 
sary so to hedge men about, either by moral restraints or by 
positive laws, as to compel them to compete fairly, always 
giving an equivalent for everything they get. 

It must not be hastily assumed that the repression by the 
government of the destructive and deceptive methods of acquir- 
ing possession of desirable things is merely negative work. 
By this kind of repression every producer is protected in the 
possession and enjoyment of the fruits of his own productive 
effort. Knowing that he will enjoy the full advantage of his 
own industry, enterprise, and foresight, he will have the strong- 
est kind of motive for exercising these virtues to their full 
capacity. This lets loose the productive energy of the people 
in a way which would be impossible without the protection of 
law and government. The people can be trusted to take the 
initiative and start all sorts of productive enterprises if they 
are thus safeguarded. There is nothing any more positive and 
constructive than the free spirit of a vigorous race of people 
when they are left to direct themselves in the field of produc- 
tion but are restrained from entering the fields of destruction 
and deception. They can safely be intrusted with the task of 
looking after themselves if those who are criminally inclined 
can be prevented from interfering with them. Give the people 
confidence in the justice and efficiency of the government and 
in one another, and their own productive virtues will develop, 
their industrial power will multiply itself, and the prosperity 
and power of the nation will be assured. 

Confidence and economy. Confidence is one of the greatest 
of all economizers of human energy. Its greatest value is not 
in the stability which it brings to the financial market, though 
that is very important. It is found rather in the unshackling 



54 PRINCIPLES OF POLITICAL ECONOMY 

of enterprise which results from confidence in the government 
and in one's neighbors and fellow citizens. The average 
citizen has more points of contact with his neighbors, his 
associates in business, and his fellow citizens than with the 
government or the financial market. The sum total of his 
dealings with his fellows exceeds that of his dealings with both 
the government and the financial market. It is in these 
numerous points of contact, and in the vast sum of these deal- 
ings of man with man, that confidence produces its greatest 
economies, and its lack the greatest waste. 

Professor E. A. Ross, in his book entitled '' The Changing 
Chinese," mentions certain bad neighborhoods in China where 
the farmer must guard his rice field every night to keep his 
crop from being destroyed or stolen. The energy that is 
wasted when so many people stay awake every night must be 
stupendous, but this waste is a trifling matter compared with 
the discouragement and lack of enterprise which result from 
the feeling of uncertainty which such lawless conditions beget. 
Unless we have at some time been confronted by the same 
situation, we can hardly realize how much energy we save by 
being able to sleep at night in confidence that the products 
of our labor will not disappear before morning. 

Before we expend too much sympathy on those Chinese 
farmers, we should consider the condition of the fruit growers, 
gardeners, and farmers in the neighborhood of some of our 
large towns. Unless one is very favorably situated with respect 
to police protection, one is frequently compelled to keep a 
watchman or else to expose the entire produce of his toil to 
the depredations of town marauders. Even though these 
marauders are generally thoughtless rather than vicious, their 
work is just as expensive to the producer as though they were 
degenerate criminals. They occasion the same economic waste 
and discouragement ; they therefore detract just as much from 
the national efficiency and add just as much to the cost of the 
necessaries of life for all classes, the very poor as well as 



LAW AND GOVERNMENT 55 

the very rich. Their depredations are especially disastrous to 
the family garden, where the owner cannot afford to hire a 
watchman and is himself engaged in other work which makes 
it necessary for him to sleep at night. 

Observance of law a patriotic duty. There are three reasons 
for choosing the orchardist and the gardener as examples of 
producers who gain through a government and a community 
in which they can have confidence, and lose through a govern- 
ment and a community in which they can have no confidence. 
In the first place, it is so obvious that it does not have to be 
proved, that these men are producers who contribute certain 
vital necessities to the prosperity and well-being of the whole 
community, and that the community gains when they are 
successful and suffers when they are unsuccessful. In the 
second place, certain young persons who read this book may 
know something at first hand about the troubles and dis- 
couragements which those producers have. In the third place, 
it ought to be easy for the average person to understand that 
any act of his which makes it uncertain as to whether or 
not the producer will reap certain rewards of his labor is 
an injury not only to the producer but to the consumer and 
to the whole nation as well, and that, in consequence, the 
observance of law and the preservation of order are as truly 
patriotic duties as fighting the battles of one's country. 

Standardization and economy. Aside from police protection 
there are certain other important functions which law and 
government can perform better than private individuals or 
voluntary groups of individuals. One of the most important 
of these is the standardizing of coins, weights, and measures. 
Whatever differences of opinion may exist with respect to 
other functions of government, little is said or to be said 
against coining money and fixing the standards of weights 
and measures. 1 Though these two functions are grouped 

1 See the author's articles on '' Standardization in Marketing," Quarterly 
Journal of Economics^ February, 1917. 



56 PRINCIPLES OF POLITICAL ECONOMY 

together in the same clause of our federal constitution, it is 
doubtful if it is generally understood what a close connection 
there is between them. Both result in great economy of effort 
in the transfer of goods. The economy involved in transfer- 
ring coined money instead of uncoined metal is apparent. Coin- 
ing the metal by a reliable and responsible government merely 
gives the public confidence in its weight and fineness. When 
it is once coined, it is enabled to pass from hand to hand 
without the labor of inspection on the part of everyone who 
receives it. Otherwise the receiver would always have to weigh 
it to determine its quantity and test it to determine its quality. 
When it is coined it " sells " (if we may speak of selling money) 
on grade and reputation rather than on inspection. Confidence 
is what makes it sell on grade and reputation ; lack of con- 
fidence would necessitate inspection, that is, weighing and 
testing, which would be very wasteful of time and labor. 

By the process of standardization any other commodity may 
also sell on grade and reputation rather than on inspection. 
This also would be economical and, as in the case of coin, 
would be a result of confidence. All civilized governments 
have done something toward standardization and the establish- 
ment of confidence by fixing uniform standards for deter- 
mining quantity ; that is, by fixing standards of weights and 
measures. In proportion as these standards are fixed and 
enforced by law we save time and energy in transferring 
goods. If it were possible to go farther and both fix and 
enforce standards of quality as well as of quantity, still greater 
economies would be effected. 

Individuals and firms have frequently succeeded in standard- 
izing their goods, both as to quantity and as to quality, so 
effectively that buyers can buy on grade and reputation rather 
than on inspection. Whenever individuals or firms succeed 
in inspiring such a degree of confidence, it generally increases 
the salability of their goods. It saves the purchaser some 
time and trouble, and he is usually willing to pay something 



LAW AND GOVERNMENT 57 

for that saving. Only the government, however, can enforce 
uniform standards among all producers and all dealers. 

Not the least of the advantages of a minute division of 
labor 1 is the fact that each individual can avoid the necessity 
of being expert in many things, and therefore has time to 
become a specialist in one thing. One of the advantages of 
standardizing commodities is that the average consumer can 
save himself the trouble of being an expert buyer or an expert 
judge of the many things which he has to purchase. If he 
has confidence not only in the weights and measures but also 
in the government which standardizes and the seller who 
uses them, and if he has the same degree of confidence in 
the alleged quality of the goods offered for sale, he may make 
his purchases with very little expenditure of time and strength 
and save his time and strength for his own special work. 

The enforcement of contracts and agreements is another 
way of creating confidence, and, through the creation of con- 
fidence, of economizing energy and encouraging production. 
Where m.en commonly regard contracts as scraps of paper, and 
do not solemnly and completely fulfill them, and where law 
and government fail to compel their literal fulfillment, there 
would, of course, be great difficulty in working together in 
productive enterprises. 

The exercise of authority. It is clear, therefore, that one 
very important function of government is to create that state 
of confidence which results in economy, and to create it, first, 
by repressing destruction and deception through the police 
power of the state, second, by standardizing products, and, 
third, by enforcing contracts. These tasks, which are neces- 
sary in the interest of the highest economy, are thrown upon 
the government because no other agency is in a position to 
perform them. They call for the exercise of authority, backed 
up by physical force, and that is a work which can be intrusted 
to no private agency. 

1 See Chapter XI, The Division of Labor. 



58 PRINCIPLES OF POLITICAL ECONOMY 

We need not limit the functions of government, however, 
to those requiring the exercise of authority, though usually 
it will be found that the government is best fitted to perform 
those which require some degree of authority, whereas private 
individuals and organizations can usually be intrusted with 
those enterprises which can be carried out wholly on the basis 
of free contract. This distinction is not always clear, but a 
little careful study will usually reveal the fact that there is an 
element of compulsion in those enterprises which the govern- 
ment carries on most successfully. The maintenance of light- 
houses will serve as an illustration. If a private company were 
to maintain lighthouses, its product, light, would be difficult 
to sell. The light would shine for all who came within its 
reach, and the shipowner who refused to pay for it would 
get the same advantage as the one who paid his share. All 
who get the benefit should be compelled to pay a share of 
the cost, either in the form of taxation or in some other form. 
This requires a power of compulsion which the government 
alone possesses. 

Even in the case of the post office, as it is thought best to 
run it, there is an element of compulsion. Many local post 
offices are maintained at a loss, since there is not local busi- 
ness enough to pay expenses. Under private management 
these local offices w^ould be closed, unless the people of the 
neighborhood would voluntarily pay enough postage to cover 
expenses, or unless larger communities . would voluntarily pay 
enough surplus to cover the losses on the smaller offices. It 
is deemed expedient to establish a uniform rate, regardless of 
differences in the cost of service. Some people are therefore 
compelled to pay more than the cost of the service which they 
receive, in order that others may get their service for less 
thaii it costs. No one complains of this, but it is apparent 
that it could not be carried on in this way on the basis of 
free contract. Some degree of compulsion is necessary in 
order to compel some people in some localities to pay higher 



LAW AND GOVERNMENT 59 

rates than are necessary, — higher than they would have to 
pay if they were permitted to patronize private postal carriers. 
The good of the whole country seems to demand that this 
be done. The government alone can exercise the necessary 
authority, since it is sometimes thought best even to compel 
the people to pay in the form of taxes enough to cover the 
losses on the postal business. 

However, we need not hold to any hard-and-fast definition 
of the functions of the government. It is sufficient to say that 
anything is a proper task for the government if there is rea- 
sonable ground for believing that the government can do it 
better and more economically than private enterprise can rea- 
sonably be expected to do it. That reasonable ground exists 
in favor of government enterprise whenever authority or com- 
pulsion is necessary to its successful accomplishment. When 
there is no need whatever for compulsion (that is, when every 
part of the work, including the selling of the product, can be 
conducted on the voluntary basis of free contract), the general 
tendency is to leave the task to private enterprise. 

Beneficent uses of power. There is a wide difference, how- 
ever, between using force to compel a man to do something 
which he has voluntarily contracted to do and using it to com- 
pel him to do something which he has never agreed to do and 
would prefer not to do. As a matter of observation it will be 
found that most if not all of the things which the government 
is able to do well involve some element of compulsion of the 
latter kind. Public education will serve as an example. Wher- 
ever it is a success, there is either compulsory attendance or 
compulsory payment, or a combination of both. In the lower 
grades of our public-school system we have both. In the 
higher grades and in our state colleges and universities we 
have compulsory payment ; that is, the taxing power of the 
government is used to procure the means for the payment of 
expenses. Both compulsory attendance upon the lower grades 
and compulsory support of all grades are beneficent uses of 



6o PRINCIPLES OF POLITICAL ECONOMY 

the power of the government over the individual ; but it must 
be remembered that it is the use of power. There is no reason 
for beUeving that a government school on a purely voluntary 
basis would be superior to a private school ; that is to say, if 
both attendance and payment were voluntary on the part of 
individuals, it is difficult to see how it could be more successfully 
managed by the government than by some private agency. 

That which is true of public education appears to be true 
of every other enterprise upon which it would be possible 
for the government to enter. The government has no advan- 
tage over a private individual or a voluntary association of 
individuals except in the use of force or compulsion. That 
is to say, any enterprise which can be carried on on a purely 
voluntary and contractual basis, without any use of compul- 
sion except in the enforcement of contracts which are them- 
selves voluntarily entered into, can probably be fully as well 
managed by private individuals and associations as by the gov- 
ernment; but if any degree of compulsion is necessary in 
order to insure its success, it becomes a fit subject for gov- 
ernment enterprise. There is undoubtedly a large field for 
the beneficent exercise of compulsion. There is also a large 
field where freedom and voluntary agreements are better than 
compulsion. If we can locate the limits of the beneficent 
exercise of force, we shall have located the limits to the 
beneficent exercise of government enterprise. 

Human interests sometimes in conflict and sometimes in 
harmony. In a previous chapter it was pointed out that 
human interests are frequently in conflict with one another. 
They are also frequently in harmony with one another. Where 
they are in conflict, that is, where one man's interest conflicts 
with that of someone else, there is likely to be trouble. 
Only three things can prevent uneconomic, that is to say, 
either destructive or deceptive, conflict. The first is the vol- 
untary submission of the weaker man through fear. That 
results in despotism. The second is such moral self-restraint 



LAW AND GOVERNMENT 6 1 

on the part of one or both as will prevent a quarrel. Willing- 
ness to give up not only one's coat but one's cloak also 
would preserve peace. The third is a strong and effective 
umpire who will promptly decide the case and enforce his 
decision upon both parties to the conflict. This umpire is 
the government. 

It will generally be agreed, except by extreme anarchists, 
that wherever human interests come in conflict, a strong um- 
pire of some kind will be necessary until men are so self- 
restrained by their morals or their religion as to govern 
themselves. Without such self-restraint the conflict of inter- 
ests will result in the wasting of human life and energy by 
destructive combats, fights, and duels, unless there is a govern- 
ment at hand to settle the difference and send the disputants 
about their business. 

Government control unnecessary where human interests are 
in harmony. But human interests are sometimes harmonious. 
When this is the case, the individual who pursues his own 
interest is also promoting the interest of others. Within this 
field where interests are in harmony it is true, as Adam Smith 
said long ago, that we are sometimes led as by an invisible hand 
to promote the public interest while trying to promote our 
own.i It is to the interest of the farmer to grow good crops ; 
it is likewise to the interest of the public to have him do 
so. In this and a vast multitude of other cases the individual 
needs no compulsion to lead him to promote the public good. 
In all such cases it seems to work better in the long run 
to leave the individual very much to himself. The wise 
government will generally keep its hands off. 

1 He generally, indeed, neither intends to promote the public interest, nor 
knows how much he is promoting it. . . . By directing [his] industry in such a 
manner as its produce may be of greatest value, he intends only his own gain, 
and he is in this, as in many other cases, led by an invisible hand to promote 
an end which was no part of his intention. ... By pursuing his own interest 
he frequently promotes that of society more effectually than when he really 
intends to promote it. — "Wealth of Nations," Book IV, Chapter II. 



62 PRINCIPLES OF POLITICAL ECONOMY 

Tendency of government officers to increase their own power 
and importance. There is, however, a natural tendency in all 
human beings to wish to magnify their own power and im- 
portance. This tendency seems to be peculiarly strong in that 
kind of person who manages to get elected to public office. 
Modesty is not the outstanding characteristic of the average 
candidate who seeks office, though he may feign it pretty well. 
The more the government undertakes, the greater becomes the 
power and importance of the officeholder. There is, therefore, 
a strong tendency on the part of all successful candidates to 
extend the functions of government. The arguments in favor 
of this policy as used by the elected are sometimes so subtle 
as to deceive the very elect. They are always made as though 
in the interest of the people, though they are really in the 
interest of the officeholding class. It is a means of exalting 
the position of the vote getter. It therefore behooves the 
average citizen who has no hope of public office to study 
very critically all arguments in favoring the extension of the 
functions of the government. 

The incompetent. There is, however, the question of the 
people who are not competent to pursue intelligently either 
their own interest or the public interest. The feeble-minded, 
the insane, and the immature who have no natural guardians 
must of course have their interests looked after and cared for 
by the government. With them it is not a question of the 
conflict or harmony of their interests with those of the public ; 
it is a question of their competence to pursue even their own 
interests intelligently. 

The individual's wisdom is not increased suddenly when 
he is put into public office. Is anyone really competent to 
pursue his own interest intelligently.? This question is some- 
times asked by those who advocate government activity in 
behalf of all classes of people. This is not a very convincing 
argument, for the reason that it goes too far. If no one is 
competent to look after his own interests, how can he possibly 



LAW AND GOVERNMENT 63 

be competent to look after the interests of the rest of man- 
kind ? The officeholder is merely a man or a woman like the 
rest of us. If we are not able to look after ourselves, neither 
is he or she able to look after himself or herself, much less 
to look after the rest of us. 

Because of such considerations as these the wisdom of 
mankind has for centuries moved toward the conclusion that 
government should confine itself mainly to the control of the 
field where individual interests come in conflict, leaving mature 
people of sound mind to govern themselves wherever and 
whenever their interests are harmonious. There are occasional 
reactionary tendencies toward more government interference, 
but these are usually encouraged by those whose expertness 
lies in the direction of vote getting rather than by those 
v/hose expertness consists in the power to do the useful and 
necessary things. 



CHAPTER VI 



MORALS AND RELIGION 



It was suggested in a former chapter that the prosperity of 
a nation depended more upon the economizing and utiUzing 
of its fund of human energy than upon any other factor, and 
that in consequence the most destructive forms of waste were 
those which wasted or dissipated portions of that fund. When 
a man's energy is going to waste, his Hfe is going to waste, 
and he becomes a drain upon, rather than an addition to, the 
national strength. The following outline indicates some of the 
more familiar ways in which men go to waste : 

r TVi 'rll / Involuntarily (the unemployed) 
\ Voluntarily (the leisure class) 



Men who 

GO TO 

Waste 



^, • re • 1 ( Through lack of training 
The ineffectively i , , , , r 

. , < Through lack of opportunity 

l^ Through lack of initiative 



The harmfully 
employed 



Wasting their own energy 



Wasting the energy 
of other people 



J In vice 
1^ In dissipation 

' By crime 
By fraud 
By luxury 
By bad investing 
By false teaching 



For some of these forms of waste, law and government alone 
can furnish the remedy. Whenever force or compulsion is 
necessary and, at the same time, effective, government can 
and should use the force of positive law, supported by penal- 
ties. But there are many forms of waste which cannot be 

6.1 



MORALS AND RELIGION 65 

remedied by force or compulsion, at least not without causing 
greater waste of other kinds. To try to control by law such 
things as laziness, private vices, luxury, false teaching, and 
many other wasteful and harmful tendencies would require an 
intolerable amount of espionage and repression. The waste 
from this source might easily overbalance the waste from the 
bad habits which the law was trying to control. In all such 
cases we must fall back upon morals and religion to induce 
self-restraint and the voluntary adoption of sound habits. 

Can morality be taught? There are two conflicting theories 
as to the results of moral teaching. One is that such results 
are generally negligible because moral habits are the result of 
economic and social surroundings ; the other is that man's 
moral nature may be so developed by teaching and example as 
to render it proof against bad economic and social conditions, 
— that these conditions are more likely to be the result than 
the cause of the moral habits of the people. The truth seems 
to be found in a combination of these two theories. We are 
undoubtedly influenced by our surroundings, but we can also 
by sheer force of character not only resist but even overcome 
and change our surroundings. 

Again, weak characters are more largely controlled by their 
surroundings than are strong characters. Two men may go 
under a cold shower bath. One, being in vigorous health, 
comes out feeling refreshed. To him a cold shower is a 
favorable rather than an unfavorable condition. The other, 
being weak to begin with, comes out with a chill. To him it 
was an unfavorable rather than a favorable condition. Yet 
it was the same shower bath, with the same temperature etc. 
If one were studying jellyfish, one might find that they were 
the sport of such circumstances as the winds, the waves, the 
tides, and the ocean currents ; but if one were studying sharks, 
one might, with equal certainty, find that they were indepen- 
dent of all such circumstances. Similarly, if one were study- 
ing human jellyfish, one might find them and their moral 



66' PRINCIPLES OF POLITICAL ECONOMY 

habits to be the result of their economic and social surround- 
ings ; but if one were studying human sharks, one might 
reach just the opposite conclusion. As a matter of fact, those 
are the conclusions, in general, which students actually reach 
who study two different types of people. When we study 
considerable numbers of the unfortunate people who have not 
succeeded in life, or who are more or less complete failures, 
we generally attribute their failures to bad surroundings or 
unfortunate circumstances. When we study men who have 
made conspicuous successes, we are likely to attribute their 
successes to their own sterling qualities. It would be impossible 
to say whether the circumstances under which the former class 
grew up were better or worse than those under which the 
latter class grew up. In fact, many of our greatest men and 
women came out of the worst conditions. 

The unemployed. If we begin with the involuntarily idle, 
that is, the unemployed, as given in the outline on page 64, 
we shall find that many of them are the victims of circumstances 
which they lacked the strength to combat successfully. Fre- 
quently the hostile circumstances have been such as no one 
could stand against. In these cases no moral problem is 
involved. They are entitled to all the sympathy and aid which 
society can give them. In other cases it was their own weak- 
ness or their own injurious habits which made them unemploy- 
able. There is no doubt that better moral and religious 
teaching would have given them a moral brace and helped 
them to succeed. At any rate, the fact that they are now idle 
means that they are going to waste and are a drain upon, 
rather than a contribution to, the national prosperity, power, 
and greatness. Anything which can be done for future genera- 
tions to reduce the number of such unemployed people will be 
a definite contribution to the strength of the nation. More 
moral vigor, sounder habits, and better training are apparently 
needed for our economic prosperity, as well as for purely moral 
or religious reasons. 



MORALS AND RELIGION 6"] 

The leisure class. When we come to deal with the volun- 
tarily idle, that is, with the leisure class, we are on more 
certain ground. It is in no sense their misfortune, it is their 
fault, that they are idle. The fact that they are voluntarily 
rather than involuntarily idle implies that they could do some- 
thing useful if they chose, but they do not choose to do so. It 
is not opportunity which they need ; it is moral regeneration. 

We must be careful, however, not to confuse the person 
who does not have to earn his living with the person who is 
idle. Many persons of independent means are doing work of 
the very highest utility to the nation and to the world. Scien- 
tific investigation, experimentation, and invention, historical 
and literary study, agricultural and mechanical demonstration, 
political reform, and philanthropy, have all been promoted by 
men and women who could afford to give their time to such 
things. The leisure class, properly so called, includes only 
those who do little or nothing that is useful or productive, 
but give themselves over to mere self -enjoyment or self- 
cultivation. Self-cultivation as preparation for useful work is 
itself, of course, useful ; but without some useful object in 
view, that is, without a view to making one's self a con- 
tributor to the national prosperity and well-being, it is useless. 
The person who spends his time in this kind of self-cultivation 
is going to waste as truly as though he were spending his 
time in eating, drinking, and acquiring adipose tissue, gout, 
or diabetes. 

Whoever belongs to the leisure class as thus defined is a 
drain upon the wealth and prosperity of the nation. The 
nation is better off every time such a person leaves the world. 
Since he does nothing useful, nothing is lost when he ceases 
to exist. When he ceases consuming, his food and clothing 
at least are saved. His wealth, of course, remains behind even 
after he is gone. He came into the world naked, and when 
he leaves the world he takes nothing with him. The more 
such people there are in the nation in proportion to. the 



68 PRINCIPLES OF POLITICAL ECONOMY 

workers the worse it is for the nation in the long run. The 
fewer such people there are, that is, the larger the proportion 
of workers, the better off the nation will be in the long run. 
The whole nation has to be supported by the labor of those 
who work. If all the people work, the task is lightened, or 
else the people live better. If only a part of them work, the 
burden upon the workers is either heavier or else there is less 
produced and consequently less wealth. 

Do idle consumers make a market for producers? It is 
sometimes argued, however, that a large number of consumers 
who are not themselves producers is necessary to make a mar- 
ket for the producers. An appearance of reasonableness is 
given to this argument by taking the case of a single product, 
say potatoes, though any other product would do equally well. 
It is undoubtedly a good thing for the potato growers to have 
a large number of consumers of potatoes who are not them- 
selves growers of potatoes, provided the consumers have some- 
thing to give in exchange for potatoes. If the would-be 
consumers of potatoes do not have something to give in ex- 
change, the growers will gain nothing from them. The more 
the consumers have which can be given in exchange, the more 
profitable it is likely to be for the potato growers. If the con- 
sumers of potatoes are living on accumulated wealth, they will 
have less to give in exchange than they would have if, in 
addition to their accumulated wealth, they were also produc- 
ing or earning something. The more workers there are in 
other productive fields besides potato growing, the more other 
things there will be to be given in exchange for potatoes. 
This is a statement which can be repeated with respect to 
each and every, industry or occupation, which merely brings 
us back to the general statement that the more workers and 
the fewer idlers there are in any nation, the more abundant 
will goods of all kinds become, and the more rapidly will the 
nation advance in prosperity and power. Overproduction of 
everything is an impossibility. 



MORALS AND RELIGION 69 

Some are willing to grant, however, that it would be better 
economically if everyone would work than it would be if some 
wasted their time in idleness. After admitting this, it will be 
asked, nevertheless. Has not a man a right to remain idle if 
he has accumulated enough to support himself without further 
work ? Assuming that he has earned his accumulation and 
has not secured it by inheriting it, by marrying it, or by a 
fortunate speculation in land, there is something to be said 
for this contention. But he who does less well than he can, 
does ill. One who is still capable of doing useful work, and 
chooses not to do it, is certainly doing less well for his 
country than he might, even though he did well when he 
accumulated wealth. 

Should men be allowed to accumulate wealth? But why 
rely upon morals and religion to prevent this form of waste 
or ill-doing } Why not prevent men from living in idleness 
by forbidding them^ to accumulate wealth or by taking it away 
from them by law if they do so } Here is a dilemma which no 
kind of compulsion can remove. If men are not allowed to 
accumulate wealth, they will then be encouraged to consume 
their incomes as they go along. Wasteful or luxurious con- 
sumption is quite as wasteful as idleness. Here, then, is the 
dilemma. If men whose incomes are larger than is neces- 
sary to support them and their families in that degree of 
comfort which will maintain their efficiency at its maximum 
are not allowed to accumulate, they will consume more than 
is necessary ; that is, they will consume wastefully. If they 
are allowed to accumulate a part of their incomes, some of 
them will be able to accumulate so much that either they or 
their children may live without work. It is deemed better and 
more economical to allow them to accumulate, and then appeal 
to them on moral and religious grounds not to waste their lives 
in idleness or useless self amusement, but to use both their 
time and their wealth productively, than to take away their 
accumulations and thus encourage them to consume wastefully. 



70 PRINCIPLES OF POLITICAL ECONOMY 

Let us assume, by way of illustration, that two men, A and 
B, have equal incomes, and that their incomes are more than 
sufficient to maintain them and their families in efficient com- 
fort. A consumes his entire income and never accumulates 
anything, while B consumes only a part of his income, invest- 
ing the remainder in productive enterprises of various kinds. 
The overconsumpt'ion of A and his family accomplishes noth- 
ing. What they consume over and above that which is neces- 
sary for efficient comfort is wasted as far as the rest of the 
country is concerned, and might just as well have been burned 
or thrown into the sea if that would have given them any 
amusement or satisfaction. B's surplus, however, has gone 
into the expansion of industries and the increase of the pro- 
ductive power of the country. Up to this point B has done 
much better than A. Now let us assume that after a period 
of years B decides that he has worked long enough, and that 
he will spend the rest of his life in sheer idleness or self- 
amusement. A, having accumulated nothing, cannot retire, but 
is compelled to go on working as long as he is able. From 
this point on, A is doing better than B. During their whole 
lives it is difficult to say which does the better, but the odds 
are slightly in favor of B. If, however, B can be persuaded 
not to remain idle, but to continue doing something useful, 
even if he does give up his earlier business, the advantage 
is decidedly with B. 

The kind of talent that goes to waste. There is one aspect 
of the problem of the leisure class which makes it especially 
important. That is the quality of the people of whom it is 
made up. If this class were made up of the ignorant, the 
weak, and the incompetent, the loss would not be so great. 
That part of the leisure class which is commonly referred 
to as the tramp, or hobo, class may be thus described. There 
is a certain amount of waste involved here ; but as long as 
they do not become a positive nuisance by their lawlessness 
and vagrancy, the waste is not so very great. Even if they 



MORALS AND RELIGION 71 

were all at work, they would not be worth much ; consequently 
the mere fact that they are idle does not of itself occasion 
much loss. Their criminality is of course another matter. 

That which is commonly known as the leisure class, how- 
ever, differs from the vagrant class in at least one important 
particular. It is made up in the main of men and women 
of more than average native capacity. The man, for example, 
who has been able to accumulate a fortune out of his own 
earnings, or by his own business foresight and capacity, is 
pretty certain to be a man of considerable productive capacity. 
If he chooses to use that capacity in productive enterprises, 
he can add materially to the wealth and prosperity of the 
whole community. If he chooses not to use it, the loss to 
the community is correspondingly great. These considera- 
tions present a problem of the very greatest magnitude. The 
greater the productive capacity of the individual, the more 
desirable it is, from the standpoint of national prosperity, that 
he shall use that capacity. On the other hand, the greater 
his capacity, the more likely he is to accumulate a fortune ; 
and, consequently, if he is not controlled by high moral and 
religious motives, the more likely he is to retire from busi- 
ness and live in idleness. If he were a man of low productive 
capacity, it would not be so great a loss if he were to retire ; 
but such a man will seldom be able to accumulate a sufficient 
fortune to be able to retire. 

Lest there should remain some doubt as to whether it is 
a loss to society when a man of great capacity for usefulness 
stops working, let us consider the case of a great surgeon. 
The author has such a man in mind. He is so skillful and 
so capable that his services are sought by large numbers of 
people. He could have retired years ago and lived in elegant 
leisure on his accumulated wealth. Had he chosen to do so, 
some hundreds of people would have been deprived of the 
benefit of his skill. Had he been a man of mediocre ability, 
it would not have mattered much ; but a man of mediocre 



72 PRINCIPLES OF POLITICAL ECONOMY 

ability could not have accumulated enough to be able to stop 
working. The fact that this brilliant surgeon is so much 
needed is the very thing which would have made it possible, 
if he had been a man of perverted morals, to stop working; 
but that is the very reason why he should not stop. There 
seems to be no solution of the problem, except sound moral 
standards which will keep such men busy. If they lack such 
sound moral standards, even compulsion would not call forth 
their best efforts. That which has been said of our great surgeon 
may be repeated of any great man in any useful occupation. 

The ineffectively employed. By the ineffectively employed 
are meant all those who, through lack of training, lack of oppor- 
tunity, or sheer lack of initiative, are now doing less useful 
work than they might have been doing had they had the proper 
training, opportunity, and initiative. These include men who 
are doing unskilled work who might have been doing skilled 
work, men doing skilled manual work who might have been 
doing expert mental work, or men doing routine mental work 
who might have been doing work requiring inventiveness, origi- 
nality, and enterprise. This is primarily an educational rather 
than a moral problem. The question of morals and religion 
enters into the problem to a certain extent, however. No mat- 
ter how many and excellent are the schools and other educa- 
tional opportunities, unless students are inspired with a high 
purpose to make use of the opportunities which are furnished, 
these opportunties alone will not solve the problem. Large 
numbers will remain unskilled, ignorant, and in a low state of 
productivity. The individual who remains less useful to the 
nation than he might be is not only doing himself an injury 
but is also injuring the nation. He who does less well than 
he can does ill. 

Vice as waste of energy. One very good definition of a 
vice is that it is a habit which wastes or dissipates human 
energy. It should, perhaps, be distinguished from crime in that 
vice wastes one's own energy, whereas crime wastes not only 



MORALS AND RELIGION 73 

one's own but that of other people besides. No community 
which wastes in either way a large proportion of its energy can 
hope to prosper as much as a community which does not. The 
use of drugs which merely produce excitation or irritation of the 
nerves, overindulgence in any kind of excitement beyond what 
is necessary for recreation, or even excessive devotion to sport, 
may become a vice in this sense as truly as excessive eating or 
drinking. Crime and fraud seem to call for the use of the 
compulsory power of the state rather than for moral suasion. 
Luxury. Luxurious consumption can be controlled by au- 
thority and compulsion to a certain extent, but not wholly ; 
that is to say, there are certain clear and undebatable forms 
of luxurious consumption, such as the use of alcohol and 
opium, which the government can safely prohibit, but much 
must be left to the discretion of the individual. There is a 
time-worn argument to the effect that luxurious expenditure 
gives employment to labor and thus benefits the poor. This 
is similar in principle to the theory that the destruction of 
property, say the burning of a building or the breaking of a 
window, gives employment to labor. The stupidity of this argu- 
ment was never more clearly shown than by Frederic Bastiat 
in his famous work entitled " Sophisms of Political Economy." 
He pictures a shopkeeper who is about to chastise a scapegrace 
son who has broken a pane of glass. Some sympathetic by- 
standers argue that the boy is really a public benefactor in 
that he has made work for the glazier, who will then have six 
francs, the cost of a new pane, to spend, and that the butcher, 
the baker, and others will share in the benefit. 

'' Assuming that it becomes necessary to spend six francs in repairing the 
damage, if you mean to say that the accident brings in six francs to the 
glazier, and to that extent encourages his trade, I grant it fairly and frankly, 
and admit that you reason justly. 

" The glazier arrives, does his work, pockets his money, rubs his hands, 
and blesses the scapegrace son. That is what we see. 

" But if, by way of deduction, you come to conclude, as is too often done, 
that it is a good thing to break windows, that it makes money circulate, and 



74 PRINCIPLES OF POLITICAL ECONOMY 

that encouragement to trade in general is the result, I am obliged to cry, 
halt ! Your theory stops at what we see, and takes no account of what we 
don't see. 

" We don't see that since our burgess has been obliged to spend his six 
francs on one thing, he can no longer spend them on another. 

" We don't see that if he had not this pane to replace, he would have 
replaced, for example, his shoes, which are down at the heels ; or have 
placed a new book on his shelf. In short, he would have employed his 
six francs in a way in which he cannot employ them now. Let us see then 
how the account stands with trade in general. The pane being broken, 
the glazier's trade is benefited to the extent of six francs. That is what 
we see. 

" If the pane had not been broken, the shoemaker's or some other trade 
would have been encouraged to the extent of six francs. That is what we 
don't see. And if we take into account what we don't see, which is a nega- 
tive fact, as well as what we do see, which is a positive fact, we shall dis- 
cover that trade in general, or the aggregate of national industry, has no 
interest, one way or the other, whether windows are broken or not. 

" Let us see, again, how the account stands with Jacques Bonhomme. 
On the last hypothesis, that of the pane being broken, he spends six 
francs, and gets neither more nor less than he had before, namely, the use 
and enjoyment of a pane of glass. On the other hypothesis, namely, that 
the accident had not happened, he would have expended six francs on 
shoes, and would have had the enjoyment both of the shoes and the pane 
of glass. 

" Now as the good burgess, Jacques Bonhomme, constitutes a fraction of 
society at large, we are forced to conclude that society, taken in the aggre- 
gate, and after all accounts of labor and enjoyment have been squared, has 
lost the value of the pane which has been broken." 

In one respect the argument against luxury is less strong 
than that against the breaking of a pane of glass, but in an- 
other respect it is stronger. When the shopkeeper in the story 
has to spend six francs on a pane of glass, he gets no satis- 
faction out of it and deprives himself of a pair of shoes 
which he needs. Had he spent the six francs on a luxury, 
he would presumably have got some enjoyment out of it, 
even though it had been followed by indigestion or a head- 
ache. To this extent it would have been better to have a 
luxury costing six francs than to have been compelled, through 



MORALS AND RELIGION 75 

the carelessness of an overexuberant son, to spend that amount 
on a pane of glass. On the other hand, when one compares 
the expenditure of money for a luxury with the investment 
of money in tools or other instruments of production, one 
does not get so favorable a picture. When one spends money 
for a luxury, one does, it is true, set labor to work, in a 
luxury-producing industry ; but if one were to spend the 
same amount of money for tools, one would set an equal 
quantity of labor to work in a tool-producing industry. It is 
at least as desirable to give work to toolmakers as to luxury 
producers. In fact, it is much more desirable. The more 
men there are working in tool-making industries, the better 
supplied with tools the nation will be. The way they are set 
to work is by the purchase of tools ; that is, by the investment 
of money in tools. 

If you have a dollar to spend over and above what is neces- 
sary to maintain you in efficient comfort, you have your choice 
of spending it on some unnecessary article of consumption or 
of investing it in some productive enterprise. Whether it be 
a dollar or a hundred thousand dollars, the principle is the 
same. If you decide to invest your money in a productive 
enterprise, you tend, to the extent of your investment, to set 
labor to work erecting the buildings or manufacturing the 
machines which will be needed in production. The more 
people there are who are investing in this way, and the more 
they invest, the more productive enterprises we shall have. 
This not only sets labor to work preparing the buildings and 
machinery, but will continue to employ labor to run the enter- 
prises. Again, as a result of this, more goods are produced 
and the nation is better fed, clothed, and supplied with all 
necessaries. It is therefore very much better that there should 
be a great many people investing their money productively 
than that they should merely spend their money for extrava- 
gant luxuries which are of no use to anyone except themselves. 
He who does less well with his money than he might do is 



J6 PRINCIPLES OF POLITICAL ECONOMY 

doing badly. He' therefore does badly who spends his money 
luxuriously when he might invest it productively. 

Emulation in extravagance. Nothing could contribute more 
to the general prosperity and well-being of the nation than 
such moral habits as would discourage extravagant consumption 
and encourage thrift and wise investments in all sorts of pro- 
ductive enterprises. A particularly vicious and wasteful factor 
in many a social group is competition or emulation in extrava- 
gance. What Professor Thorstein Veblen^ has called ''con- 
spicuous waste " is sometimes required of everyone with social 
ambitions. Of all forms of competition, competitive consump- 
tion is the most pernicious and wasteful. When men and 
women try to advertise their solvency by ostentatious waste- 
fulness, there develops a real competition to see who can 
advertise most effectively. 

This is part of a very widespread tendency. Certain Chinese 
mandarins of an older day used to allow their finger nails to 
grow to inordinate lengths as a visible sign that they did not 
have to work. The binding of the feet of women served 
much the ,same purpose. Where work is not regarded as 
respectable, some visible sign of respectability is generally 
sought. Sometimes these customs are copied even by those 
who do have to work, as in the case of high-heeled shoes 
and of long trains. 

Emulation in the waste of physical energy. It is not only 
the possession of plenty of money which is thus vulgarly 
advertised. The possession of abounding physical energy is 
also advertised by the practice of conspicuous vices which tend 
to dissipate energy. The young man who can dissipate freely 
can thus advertise to the world that he has health and energy 
to spare, just as he can advertise to the world that he has 
money to spare when he spends it extravagantly. When there 
is no sense of moral values and no sober self-restraint, the 
possession of abundant health and the possession of abundant 

1 The Theory of the Leisure Class. 



MORALS AND RELIGION "jy 

money lead to equally demoralizing vices. The poor are safe- 
guarded by their poverty from the extravagant use of money, 
but they are quite as likely to indulge in the extravagant uses 
of vitality as are the rich. If there be any difference, the 
dissipation of physical energy is worse than the dissipation 
of money. 

The teacher, the preacher, or the moral leader who can 
persuade the people to abandon such habits and use their 
surplus money and their surplus energy productively rather 
than wastefully will deserve to stand among the greatest of 
statesmen and nation builders. Nations are built by the wise 
expenditure of human energy. The less it is wasted, and the 
more it is used up in production or useful work, the greater 
the progress of the nation. 

We have chosen to discuss, in this chapter, a theme which 
is not ordinarily treated in works on economics. It has gener- 
ally been assumed that economics had nothing to do with 
morals and religion. With certain sentimental and conventional 
aspects of these human interests, perhaps the economist has 
nothing to do. But in so far as they are factors, or may be- 
come factors, in national wealth, prosperity, and power, noth- 
ing can be of more interest to the economist. Even religion, 
if it stimulates the productive virtues and discourages the vices 
which waste and dissipate humxan energy, may become one of 
the greatest factors in the building of a great, prosperous, and 
powerful nation. The nation which possesses such a religion 
will eventually outgrow in all these particulars the nation 
which does not, or which possesses a religion which enervates, 
which lulls to sleep, or which represses the productive virtues.^ 

1 For a fuller discussion of this topic, see the author's book entitled " The 
Religion Worth Having." Houghton Mifflin Company, Boston, 191 2. 



CHAPTER VII 

THE GEOGRAPHICAL SITUATION 

The human factor is the most important factor in national 
prosperity. Nevertheless, the natural situation is a factor which 
must be taken into consideration. However gifted and coura- 
geous a race may be, it will find it easier to expand and become 
prosperous, powerful, and great in a favorable than in an 
unfavorable environment. 

Importance of environment. But what is a favorable envi- 
ronment .? It is easy to overemphasize the bodily comfort of 
living in a warm as opposed to a hot or a cold climate, and 
to ignore the bracing effects of changeable weather. It is also 
easy to overemphasize the tremendous productivity of certain 
tropical regions and to forget that they produce the enemies 
as well as the friends of man in great profusion. It is equally 
easy to go too far in the opposite direction and to hold that 
hard conditions, such as a harsh climate and a sterile soil, are 
best for man's development. If hard conditions are all that 
men need, the Eskimos of the Far North are peculiarly blest. 

If we take everything into consideration, it is probable that 
the temperate zones are most favorable to man's development 
as well as to his prosperity. He has here fewer unconquerable 
enemies than in the tropics or in the frigid zones. He finds 
a wider variety of useful materials, such as grass, timber, and 
minerals, and he finds them in greater abundance here than 
elsewhere. Here the advantages to be gained by work are 
more obvious and more easily comprehended by the average 
intellect than anywhere else. The intelligence required to see 
the advantage of building shelters, making clothing, and 
kindling fires, especially in a place where, along with the cold 

78 



THE GEOGRAPHICAL SITUATION 79 

weather, there is an abundance of suitable material, is not very- 
great. It requires much more scientific knowledge to enable 
men to guard against the hookworm and the various harmful 
bacteria which infest the tropics. These, together with veno- 
mous insects and reptiles, not to mention the larger beasts of 
prey, imperil the lives of the dwellers in the tropics quite as 
much as our cold winters imperil the lives of dwellers in these 
northern latitudes. 

Northern-grown crops are generally best. It is a fact of 
observation, however we may account for it, that many of our 
farm crops reach their highest perfection very near the northern 
limits of the areas within which they can be grown without 
injury from frost. The cotton belt of this country, though 
confined to the southern states, is in reality near the northern 
limit for cotton. Our corn belt is likewise near the northern 
limit for corn. The oranges of California and Florida are 
likewise grown near the line where frost will destroy the crop. 
The potato and the sugar beet do better either in high altitudes 
or high latitudes, where the summers are barely warm enough 
and the seasons barely long enough to mature the crop. One 
explanation of this general rule is that by migrating northward 
a plant escapes many of its ancient and hereditary enemies. 
When seed corn is saved, dried, and protected during the 
winter, and special care given it during the growing season, 
it can grow farther north than would be possible if it had to 
shift for itself. Its natural enemies in its original habitat, not 
having man's help, cannot live over winter or mature between 
frosts in our corn belt. Therefore the corn plant escapes 
some of its worst enemies. The same is true of the. cotton 
plant (though some of its ancient enemies seem to be following 
it northward) and also of other plants which seem to flourish 
under cultivation in latitudes where they could not survive 
without cultivation. Similarly, when man learns to keep him- 
self warm by building houses, manufacturing clothing, and 
making fires, he can live in latitudes which enable him to 



So PRINCIPLES OF POLITICAL ECONOMY 

escape some of his ancient and hereditary enemies, such as the 
hookworm and the germs of yellow fever, malaria, etc. The 
northern limit of his best development, however, must coin- 
cide with the northern limits of the production of abundant 
means of satisfying his multifarious desires. Another expla- 
nation is that during the growing season for plants, that is, 
during the summer, the days are longer in high than in low 
latitudes. This gives plants more light while they are growing. 
The proportion of sugar in sugar beets seems to depend upon 
the amount of sunlight which they get while they are growing. 

Buckle's generalizations. In his famous work, '' The History 
of Civilization in England," Henry Thomas Buckle makes a 
great deal of several other factors in the geographical situa- 
tion. These he groups under four heads, namely, climate, food, 
soil, and the general aspect of nature. He goes to the extreme 
of attributing to these factors a controlling influence not only 
on the economic prosperity of the people but even on their 
intellectual, moral, and religious development as well. With- 
out following him to these extremes, we may profitably give 
attention to some of his observations regarding the influence 
exercised by these factors on the industrial development of a 
people. No one is likely to deny that the presence of cheap coal 
has had a great deal to do with the economic development of 
Europe and America, or that the former abundance of timber 
in this country had a great deal to do with the kind of houses 
we built and are still building. A shingled roof, for example, is 
unknown except in countries where timber has been abundant. 

That ancient civilizations arose in regions where labor 
applied to land was highly productive is a commonplace in 
history. The fertile river valleys of Egypt, Mesopotamia, India, 
and China supported civilizations when our European ancestors 
were still savages. Here food was so abundant that men 
had time to do other things besides satisfying their imme- 
diate daily needs ; or, rather, a part of the population could 
produce food enough to support the rest while the latter gave- 



THE GEOGRAPHICAL SITUATION 8i 

their time to other things. Art, architecture, philosophy, reh- 
gion, and government could therefore flourish. The civiliza- 
tions which have since grown up in latitudes farther north 
may not have exceeded those earlier civilizations in physical 
magnificence, but they have exceeded them in all that makes 
for the comfort and well-being of the average man. 

On the other hand, the overpowering influence of the terrific 
productiveness of nature in certain tropical regions is sufficient 
to discourage man's enterprise. Kipling's story entitled '* Let- 
ting in the Jungle " ^ gives a vivid picture of the way in which 
the jungle struggles to reassert itself, — to flow back, as it 
were, upon a cleared area, and overwhelm it as with a flood of 
rank vegetation. Concerning India, Buckle writes : 

Besides the dangers incidental to tropical climates, there are those noble 
mountains which seem to touch the sky, and from whose sides are dis- 
charged mighty rivers which no art can divert from their course and which 
no bridge has ever been able to span. There, too, are impassable forests, 
whole countries lined with interminable jungle, and beyond them, again, 
dreary and boundless deserts, — all teaching man his own feebleness and 
his inability to cope with natural forces. Without, and on either side, there 
are great seas, ravaged by tempests far more destructive than any known 
in Europe, and of such violence that it is impossible to guard against their 
effects. And as if in those regions everything combined to cramp the 
activity of man, the whole line of coast from the mouth of the Ganges to 
the extreme south of the peninsula does not contain a single safe and capa- 
cious harbor, not one port that affords a refuge which is perhaps more 
necessary there than in any other part of the world. 

In contrast to India, Buckle points to Greece as a country 
where everything invites man to dominate. There is nothing 
to terrify or overwhelm him. Everything tends to exalt the 
dignity of man, while in India everything tends to depress it. 

The zone of the founders of religion. Peschel, in his '' Races 
of Man " quotes from an old Arabian geographer who -divided 
the earth into zones, one of which, that between 19° and 33° 
49^ north latitude, was the zone of the founders of religion. 

1 In " The Second Jungle Book." 



82 PRINCIPLES OF POLITICAL ECONOMY 

He points out that in this zone were born all the great founders 
of religion and all the philosophers and scholars, himself in- 
cluded. Zoroaster, Moses, Buddha, Christ, and Mohammed 
were all born in that zone. Regarding the influence of the 
desert upon the mind, Peschel writes: 

All who have been in the desert extol its beneficent influence on the 
health and spirits, Aloys Sprenger declares that the air of the desert 
invigorated him more than that of the high Alps or of the Himalayas. . . . 
The desert has impressed the Arabs with their remarkable historical char- 
acter. In the boundless plains the imagination which guides the youth of 
men is filled with images quite different from those suggested by forest 
country. The thoughts thus acquired are noble rather than numerous. . . . 
Every traveler who has crossed the deserts of Arabia and Asia Minor 
speaks enthusiastically of their beauties. All praise their atmosphere and 
brightness and tell of a feeling of invigoration and a perceptible increase of 
intellectual elasticity ; hence, between the arched heavens and the unbounded 
expanse of plain, a monotheistic frame of mind necessarily steals upon the 
children of the desert. 

Professor Ellsworth Huntington,^ on the other hand, finds 
greater stimulus to mental activity in a changeable climate with 
frequent variations of temperature. 

The geographical advantages of the United States. Coming 
to our own country, we have a combination of most of the 
geographical factors mentioned by Buckle and others. We 
have the broken landscape, low mountain ranges, and small 
rivers of the Atlantic seaboard. The great fertile valley of 
the Mississippi and its tributaries, the vast plains of the great 
West, the semidesert conditions of the Southwest, the tower- 
ing mountain ranges of the Rockies and the Sierras, and the 
mild climate and gentle slopes of the Pacific coast. If the 
mind of man is strongly influenced by its geographical sur- 
roundings, we have an opportunity of developing a many-sided 
and variegated civilization. 

1 The Pulse of Asia. See also " Climatic Changes and Agricultural Exhaus- 
tion as Elements in the Fall of Rome," Quarterly Journal of Economics, 
February, 19 17. 



THE GEOGRAPHICAL SITUATION 83 

The eastern half of the United States, being virtually sur- 
rounded on three 'sides by water, like the greater part of 
Europe, is assured of an adequate quantity of moisture. The 
western half is more or less deficient in moisture, except the 
extreme northwest corner and certain high mountain altitudes. 
These arid and semiarid regions, where the streams do not 
supply water enough for irrigation, may, in places where con- 
ditions are favorable, be made to grow crops under methods 
known as dry farming. The rest will probably be a perma- 
nent grazing country. Even our irrigable land, while but a 
fraction of the total, amounts to a small empire in itself. 

A broad strip running from the Atlantic seaboard to the 
hundredth meridian, and a little north of the middle, com- 
prises the great grain, hay, and livestock region. Another 
broad strip, lying south of this, is the cotton belt. Along our 
northern border from Maine to northern New York is a lum- 
ber, dairy, and potato region, and a natural summer play- 
ground for the city people. A continuation of this strip, 
including the northern halves of Michigan, Wisconsin, and 
Minnesota, is an undeveloped region, formerly covered with 
forest but now largely cut over. Most of it is excellent land 
for potatoes and small grains, and is capable of feeding a 
vast population. Another undeveloped strip along the Gulf 
coast from Florida to Texas, just south of the cotton belt, is 
also largely cut-over timber land. Much of this is ideal land 
for fruit and truck farming and the growing of such great 
food crops as sweet potatoes and peanuts. Whenever the de- 
mand for food is such as to insure a remunerative price for 
potatoes, both white and sweet, almost unimaginable quanti- 
ties can be grown along our northern and southern borders 
without interfering with the growing of corn, wheat, or cotton 
in the belts which are especially adapted to these great crops. 
So far as starchy food is concerned, we have opportunities for 
producing incalculable quantities. Animal products also can 
be produced in quantities sufficient for a population very much 



84 PRINCIPLES OF POLITICAL ECONOMY 

greater than the present, though it is easy for unthinking 
people greatly to exaggerate the possibilities in this direction. 

The Mississippi Valley, that is, the whole interior basin of 
the country, is one of the most productive regions in the 
entire world. In fact, it is doubtful if any region of equal 
area can be found anywhere on the globe which contains so 
great a variety and abundance of natural riches, both on the 
surface and beneath the surface. This region includes the 
greater part of our cotton belt, and we produce nearly three 
fourths of the cotton of the world. It includes all of what is 
known as our corn belt ; that is, the region where corn is the 
main crop, though corn is grown in every state in the Union. 
Corn is not only our most valuable crop but our most valuable 
single product of any kind or description ; we also grow nearly 
three fourths of the world's production of this, the most magnifi- 
cent of all crops. In this region are also the great spring-wheat 
areas of Minnesota and the Dakotas and the winter-wheat area 
extending from Ohio to the Great Plains, reaching its greatest 
density in Kansas and Nebraska. While we produce on the 
average only between a fourth and a third of the world's total 
wheat crop, we yet produce more than any other single country, 
Russia being the only close competitor. Aside from these major 
crops, this region is also rich in a number of minor crops and 
grows practically everything which will grow outside the tropics. 

Farm machinery. The reasons for this great productivity 
are first, the vast area ; second, the uniform fertility of the 
soil ; third, the uniformly level contour, making farm opera- 
tions relatively easy and inexpensive ; fourth, the uniformly 
favorable climate ; and, fifth, the general use of farm ma- 
chinery. There is probably no single area in the world where 
so much and such efficient farm machinery is used in order to 
supplement the labor of men. 

In addition to the natural ingenuity of our people, the gen- 
eral smoothness of the land and the favorableness of the 
climate must be held to account for the use of farm machinery. 



THE GEOGRAPHICAL SITUATION 85 

The summers (especially the late summer months) in this 
region are relatively dry. This has had an important effect in 
encouraging the use of harvesting and hay-making machinery. 
In some of the countries of northwestern Europe, where clear, 
dry weather is rare, the curing of hay and the drying of har- 
vested grain are more difficult problems than with us. The 
quick curing and rapid methods of harvesting and storing 
which are familiar to us are there impossible. 

Mineral wealth. Beneath the soil in this region lies a wealth 
of minerals. Bituminous coal underlies a great deal of it from 
western Pennsylvania to Wyoming. Petroleum and natural 
gas abound in the same region, and fields extend southward 
to the Gulf. Some of the richest and most extensive beds of 
iron in the world lie in northern Michigan and Minnesota. 

Throughout this region transportation is easy. The Great 
Lakes furnish cheap water transportation, as do (to a less 
extent) the Mississippi and its larger tributaries. But its 
greatest advantage for transportation is its wide extent and 
its level contour, making railroad building and operation 
relatively inexpensive. 

Bordering on this vast region, which must more and more 
become the real home and habitat of the American people, are 
the Atlantic and Pacific seaboards, adding other mineral wealth, 
forests, water power, fisheries, and opportunities for foreign 

I trade to the wealth-producing power of the whole. In view of 
all these natural riches, it is obvious that if the American peo- 

I pie do not prosper and grow in all the arts of civilization, it 
will be their own fault. Nature has done a great deal for us. 
It remains to be seen what we can do for ourselves. 

Reasons for modesty as well as for pride. A great railroad 
president used to make it a rule never to promote anyone who 

: was satisfied with his own work. The fact that he was satisfied 
argued that the person in question did not have very high 
standards of excellence, if he could be satisfied with anything 
that he had done. The people of America may well take 



86 PRINCIPLES OF POLITICAL ECONOMY 

warning from the observation of this wise man of business. 
If we are satisfied with what we have done, it means that we 
have no very high standards of national Hfe and efficiency, 
and that our progress is at an end. Before we take too much 
credit for our national wealth and prosperity, we should ask 
ourselves to what extent we did it, and to what extent nature 
did it for us. It will be a wholesome exercise for us to write 
down a list of achievements in which we have led the world, 
and then to ascertain to what extent these are due to our own 
^intelligence, energy, courage, and devotion to ideals, and to 
what extent to our favorable geographical situation and the 
richness of our resources. 

We produce more iron and steel, more corn, cotton, and 
wheat, than any other country. There are excellent geographi- 
cal reasons why we should. Mechanical inventions and the 
breeding of the trotting horse are among the few activities 
in which we have surpassed other people without the special 
aid of superior physical advantages. 



PART TWO 

PRODUCTION 

Which has to do with the adding of utility to material things, that is, 

with changing the forms of matter, with changing its location, and with 

Ipreserving it over longer or shorter periods of time, all for the purpose of 

making it more useful, or of adding utility to it 



87 



SECTION A 

THE PRODUCTIVE FORCES 

The forces by means of which we increase the number of desirable things, 
or increase the desirability of things 



CHAPTER VIII 

THE PRIMARY FACTORS OF PRODUCTION 

However strongly we believe that this is the best possible 
world, and however clearly we see that a bounteous nature 
has provided for the satisfaction of many of our needs, we 
cannot help acknowledging that, at any time and in any place 
w^here we happen to be, some desirable things are scarce, 
some undesirable things are abundant, and some things other- 
wise desirable are so superabundant as to become undesirable. 
That being the case, the obvious thing to do seems to be to 
set about improving the situation, increasing the quantity of 
those desirable things which are scarce, and decreasing the 
quantity of those things which are too abundant for our 
well-being or comfort. 

The rearrangement of matter. Matter itself cannot, of course, 
be either increased or diminished in quantity. It can be re- 
arranged in such ways as to become more usable or less harm- 
ful. This rearrangement may take on various forms. All the 
elements which are now in a loaf of bread were formerly in 
the soil, the water, and the atmosphere. In those forms they 
were of no use to man. They have been rearranged and as- 
sembled, — their form has been changed. This is sometimes 
called form-utility. The wheat from which the flour was made, 
and the flour from which the bread was made, had to be 
transported from places where there was a superabundance to 
a place where there v/as a scarcity, in order that they might 
become usable. This is sometimes called place-utility. Some 
goods have to be stored and preserved. At one time they 
are so abundant as to be unusable. At another time, unless 
they were preserved, they would be so scarce as to cause 



90 PRINCIPLES OF POLITICAL ECONOMY 

hardship or even famine. Their utility is increased by storing 
and preserving them. This is sometimes called time-utility. 

A keen observer has remarked that men are engaged in 
the simple work of moving things from one place to another. 
Whether one is writing with a pen, putting chemicals into a 
test tube, or irrigating dry land, all that men literally do is to 
move materials. Of course, there are methods and purposes 
in all this moving of things. It is method and purpose which 
the mind sees back of that which the eye sees, and which 
the mind performs beyond that which the muscles perform. 
One of the wonderful things about man's activity is the vast 
results that follow a very slight rearrangement of materials. 
By stirring the soil and placing seeds in a certain relation to 
it the forces which produce plant growth are set to work 
supplying our needs. By rearranging a few stones and clods 
a stream may be diverted and made to water barren fields 
until they blossom and bear fruit ; or the stream may be 
made to turn a wheel and drive machinery which can accom- 
plish tasks far too great for human muscles. By taking advan- 
tage of his knowledge man can, by these slight rearrangements 
of matter, harness natural forces and compel them to serve 
his purpose. 

Discriminating between friends and enemies. The general 
purpose of all this work is to increase the objects of desire 
and decrease the objects of repugnance. The process of in- 
creasing the objects of desire is, called production, and that of 
decreasing the objects of repugnance is called destruction. Fre- 
quently these two processes are so closely related as to make 
them difficult to separate. In order to increase the number 
of desirable plants, we must destroy their rivals, the weeds, 
as well as the pests which feed upon them. Out of the various 
forms of animal and plant life which would live in our neigh- 
borhood, we choose the more desirable and make it easy for 
them to live and multiply, and make it hard for the less desir- 
able to survive. Man merely holds the balance of power and 



THE PRIMARY FACTORS OF PRODUCTION 91 

uses his limited physical strength and his superior intellect in 
giving the advantage to his friends in the subhuman world 
and in placing his enemies at a disadvantage. In the field 
of mechanics, likewise, by moving a vast number of pieces of 
matter, thereby bringing natural forces into play, he assembles 
powerful engines. Then, as in the case of a locomotive engi- 
neer, by a very moderate pressure he moves a lever which 
in turn sets powerful forces to work serving his purpose. 
Other engines, equally powerful and controlled with equal 
ease, set powerful forces to work destroying his enemies, 
both human and subhuman. 

One of the labors of Hercules, it will be remembered, was 
to clean the Augean stables. According to the legend, three 
thousand oxen had been stabled there for thirty years, and 
the stalls had never been cleaned. Being required to clean 
these stables in one day, he turned the rivers Alpheus and 
Peneus through them, and thus accomplished what his mon- 
strous strength would not have enabled him to do directly. 
Very commonplace men accomplish greater engineering feats 
than that nowadays. 

Writers who have wished to impress their readers with the 
vastness of some political or social revolution have sometimes 
adopted the device of picturing someone as falling, just before 
the revolution, into a Rip Van Winkle sleep and awaking just 
after the revolution into a new world. His perplexity in trying 
to understand his new surroundings is not only amusing but 
usually very instructive. We need not adopt the device of 
whisking someone through an interval of time in order to 
impress him with the change which man has wrought in his 
material surroundings. It is only necessary to imagine a philo- 
sophical savage transported over a few hundred miles of space 
and set down in a modern industrial center. Let us imagine 
him on a busy corner of some great city, where pavements, 
street-car tracks, curbstones, and sidewalks ^ have replaced the 
native turf ; where, instead of trees, tall buildings of steel and 



92 PRINCIPLES OF POLITICAL ECONOMY 

concrete rise hundreds of feet into the air, and the narrow strip 
of blue between is obscured by elevated railroads, trolley wires, 
poles, and other obstacles; while the ground underneath is 
honeycombed with cellars and sub-cellars, subways and sub- 
subways, and a network of sewers, conduits, and other subter- 
ranean passages. In trying to picture to ourselves the surprise 
and perplexity of our philosophical savage, we may arrive at 
some conception of the magnitude of the change which man 
has wrought in his natural environment. 

Man, nature, and tools. The two original factors in this 
work are man and nature, — nature presenting the material to 
be worked upon and also certain powerful forces to aid man in 
his work, and man furnishing the knowledge, the ingenuity, the 
foresight, the patience, and also a certain amount of muscular 
or physical power to work upon the material which nature 
furnishes. Both the raw material and the natural forces, in 
their elemental state, are commonly included under the name 
land. Not only the soil fertility and the minerals, but also the 
sunlight and sun heat, the rain and the atmosphere, are com- 
monly regarded as the appurtenances of land. The most im- 
portant quality of land is that of extension. Whoever controls 
a portion of the earth's surface owns thereby the air which lies 
above it, also a certain fraction of the sun's rays and a certain 
portion of the rainfall, together with the soil and the subsoil 
immediately below the surface and the moisture beneath. 
Under some systems of law he also owns the minerals which 
are found anywhere beneath the surface. In fact, ownership of 
land, under these systems, extends from the center of the earth 
to the uttermost heights above the surface. However, we are 
not, at this point in our discussion, so much interested in what 
is included in the ownership of land as in what is included 
under land as a factor in production. It may be said to include 
all the materials furnished by nature for man to work upon. 

While man and nature are the original and primary factors 
in the problem, a very little study will show anyone that man 



THE PRIMARY FACTORS OF PRODUCTION 93 

would not accomplish very much if he relied solely upon his 
own strength and did not make use of tools to add to the 
power and effectiveness of his efforts. He can strike a harder 
blow with a stone held in the hand than with the hand alone, 
making use of the hardness of the stone and the momentum 
which goes with its weight. When he fits a handle to the stone 
he can strike a still harder blow. When the stone is provided 
with a cutting edge, it becomes still more effective for certain 
purposes. By making use of such simple mechanical devices 
as the lever and the inclined plane, he can move bodies far too 
large for the meager strength of his unaided muscles. It is a 
long road, but a fairly direct one, from these simple begin- 
nings to the mighty engines and complicated machines of the 
present day. So important have tools become in the economy 
of a modern nation that they are generally treated as a third 
factor of production, along with man and nature. While man 
and nature are the original and primary factors, and tools are 
the derived and secondary factors, they have become, in spite of 
that fact, almost as important as either of the original factors. 

Labor. The human factor is usually named labor in eco- 
nomic discussions, but it must be remembered that labor 
includes the work of the mind as well as of the body. As 
a matter of fact, labor was originally used in a much narrower 
sense. Management, or direction, was assumed to be the real 
thing, and discussions of the problems of production assumed 
the manager's point of view. What were his problems ? First, 
of course, was the problem of supplying himself with the 
three factors of production, — labor, land, and capital, or tools. 
Since tools were purchasable, a supply of purchasing power 
was all that was necessary in order to get tools. Hence, pur- 
chasing power came to be the meaning of capital. With a 
supply of these three factors, labor, land, and capital, he was 
prepared to begin the work of organizing a productive enter- 
prise. He needed good labor as well as good land and good 
tools. An adequate supply of labor, land, and capital of good 



94 PRINCIPLES OF POLITICAL ECONOMY 

quality has generally been regarded, therefore, as the primary 
factors in national prosperity. But it is quite as important, 
if not more important, that there be capable management. 
From the laborer's point of view, what he wants is more 
and better managers to hire and direct him, to bid against 
one another for his labor, not more and better laborers to 
compete with himself. This point of view is quite as impor- 
tant as that of the manager, who does not feel the need of 
more and better managers to compete with himself, but rather 
for more and better laborers to work under his direction. 

There are several reasons why it might be better to con- 
tinue using the terms man^ nahire, and tools, as we have done 
thus far in this chapter, rather than labor, lajid, and capital; 
but, on the whole, it is probably better to follow the custom 
of writers on economics and use the latter set of terms. In 
doing so, however, it must be understood that labor includes 
all effort put forth by men, whether that effort be physical 
or mental, or a combination of both ; that land includes every- 
thing which nature, outside of man, provides, even though it 
be above or below the surface of the earth ; and that capital 
includes all joint products of man and nature which are used, 
not for direct consumption by their owners, but for the pur- 
pose of aiding them in getting other goods which they can 
consume or enjoy. 

Other helps to national prosperity. National prosperity de- 
pends, to be sure, upon many other things, such as organiza- 
tion, a good system of laws which encourage rather than 
discourage production, a body of sound and wholesome tradi- 
tion, and a system of morals under which all vigorous and con- 
structive habits are called virtues, and are therefore approved 
and encouraged, and all soft and enervating habits of self- 
indulgence are called vices, and are therefore disapproved and 
discouraged. It is also important that there be a vigorous 
religion which shall lend an emotional support to this vig- 
orous type of morality, — which shall, in short, create an 



THE PRIMARY FACTORS OF PRODUCTION 95 

emotional interest in an austere and productive life. However, 
these three factors, — labor, land, and capital, — as we have 
defined them, are the elementary factors. They are the raw 
materials out of which national prosperity is built. 

Since labor means the human factor in production, it really 
includes not merely the wageworkers but all kinds and classes 
of human beings who have any part in production. It is, of 
course, just as important that there be strong, capable, and 
well-trained men as that there be productive and well-tilled 
land and good tools, machinery, and other equipment. It is 
not enough that the people be merely capable in a general 
way ; it is necessary also that they be trained in many special- 
ized forms of skill. These specialized forms of skill must, 
naturally, be the kinds that are especially needed. One might 
develop remarkable skill in the performance of a certain feat ; 
but if no one needs to have it performed, it is of no advantage 
either to the doer or to the community. This means that it is 
necessary to increase the quantity of those special forms of 
ability which seem to be in demand, — that there be more 
men who can do certain important things which relatively 
few are now capable of doing. In our complex civilization 
it is not likely that one individual or one kind of skill can pro- 
duce the whole of any article. It usually takes several men, 
each one doing a special kind of work requiring a special kind 
of skill, to produce anything. If one special kind of skill is 
lacking, the other workers may be helpless. Not many years 
ago a glass manufacturer was planning a new branch of his 
business, in which a new product was to be produced and 
several hundred men were to be employed. Brick and mortar 
and all building materials, as well as tools and machines, could 
easily be procured. All the labor necessary for the running 
of the plant was available, except one special and highly scien- 
tific expert. He could not be found in the country. As a 
consequence, the new branch of the business could not be 
started, the new product was not produced, and employment 



96 PRINCIPLES OF POLITICAL ECONOMY 

was not given to several hundred men. It was obviously very 
important for that community and for those laborers that they 
should have a larger supply of that special scientific and tech- 
nical ability. One man trained for that kind of work might 
easily have been worth as much to the country as a hundred 
men trained for a kind of work for which there were thousands 
of others already trained. 

A highly efficient system of education should have antici- 
pated the need for these experts and should have trained them. 
Given a race of high average natural ability, the problem of 
supplying these highly specialized experts is mainly a matter 
of education. The probability that among a hundred millions of 
people of high ability a few could be found with the capacity 
for the special training needed is so great as to amount to 
a certainty; but it is the task of the educational system to 
discover these persons and then to give them the necessary 
training. The nation with such an educational system as this, 
together with a population of high natural ability, is not likely 
to be beaten in economic competition. By far the most valu- 
able resource of a nation is its fund of human energy, which 
means its people. If this resource is rich to begin with, and if 
it is thoroughly developed by a sound and efficient educational 
system, the nation has the first and most important essential of 
greatness. Nations have grown rich and powerful in the midst 
of rather poor natural conditions, by reason of the fact that they 
have developed their human resources. Other nations have 
grown poor and weak in the midst of rich natural surroundings 
by reason of the fact that they have wasted or failed to develop 
the productive capabilities of their people. 

Land. Rich natural resources are, however, very important ; 
that] is to say, a nation which develops its human resources 
properly can prosper more if it possesses a rich territory than 
if it possesses a poor territory. That is so obvious as to need 
very little discussion. It is very much like saying that though 
a good farmer may manage to prosper on rather poor land, 



THE PRIMARY FACTORS OF PRODUCTION 97 

nevertheless he would prosper more on good land. This 
brings us to the consideration of the other original and pri- 
mary factor of production, namely, land. The productive power 
of land is not simply a matter of acres, any more than the 
productive power of labor is a matter of numbers. Quality is 
as important as area, though area is very important. Area is 
important in agriculture because it takes area to catch the 
sun's rays and the rainfall, without which plants cannot grow. 
It also requires area to give standing room to plants. But 
with all these advantages which go with area, if there be 
no soil or plant food in the soil, there can be no production. 

The productive power, of the soil itself depends partly upon 
its physical and partly upon its chemical condition. A good 
physical condition depends upon freedom from stones and 
other obstructions which interfere with tillage and the use of 
machines, a good subsoil which permits excess water to per- 
colate downward in time of heavy rainfall and then to rise to 
the surface in times of drought, sufficient porosity to permit the 
roots of plants to penetrate easily, sufficient firmness to lend 
support to the plants, and so on. A good chemical condition 
depends, first, upon the absence of injurious acids and alkalis 
in dangerous quantities, and, second, upon the presence of the 
elements of plant food in sufficient quantities and in proper 
proportions. Plants, like animals and human beings, need a 
balanced ration and cannot thrive without it. There are many 
of these food elements, but those which are most likely to be 
absent or insufficient are nitrogen, phosphorus, and potassium. 
Generally speaking, any soil which possesses these three ele- 
ments in the proper proportion may be said to be good soil, 
so far as plant food is concerned. The other necessary ele- 
ments are so universally abundant as to furnish the farmer 
no occasion for worry or even forethought. Only the limiting 
factors of production are considered to be of any economic 
importance. Hence only those which are likely to be scarce 
and to limit production are called economic factors. 



98 PRINCIPLES OF POLITICAL ECONOMY 

Mineral lands. Mineral lands differ so fundamentally from 
farm lands as to be almost in a class by themselves. While 
farm land is so widely distributed as to give almost every sec- 
tion of the earth's surface some opportunity for a profitable 
agriculture, and while no section can become fabulously rich 
in farm products, minerals are so localized as to leave "large 
areas of habitable territory with practically no mineral resources 
whatever, while very small districts are sometimes so rich as 
scarcely to furnish building space for the dwellings of the peo- 
ple who live by working the mines. Coal and iron are not 
only the most valuable, in the aggregate, of all the minerals, 
but they together have done more to give the peculiar character 
to our present industrial civilization than any other two factors. 
This is sometimes called the Age of Steel, but without coal to 
furnish a cheap and abundant fuel, and without the rich beds 
of iron ore, some of which can be worked with a steam shovel, 
steel could not have become so abundant and such a dominant 
factor in this industrial age. 

Capital. Capital takes on such a multiplicity of forms as 
to make it impossible to describe it beyond saying that it is 
made up of all goods, except land, which are used to get an 
income. They are distinguished from things which are used 
directly for personal gratification. Thus, all tools and machinery, 
stores, factories, shops, barns, fences, and raw materials not 
yet worked up into consumable form are capital. Dwelling 
houses occupied by their owners, food in the larders of con- 
sumers, the clothes which are in the closets as well as those 
actually being worn, books, pictures, household furniture, etc., 
are consumers' goods. The dividing line between producers' 
goods and consumers' goods is sometimes a rather dim and 
wavering one, but that need not disturb us much. The same 
may be said regarding the line which separates the animal 
from the vegetable kingdom, and yet we are never puzzled 
as to which of the two kingdoms may claim any one of our 
common plants or animals. The physician's automobile may 



THE PRIMARY FACTORS OF PRODUCTION 99 

be at one time a tool of his profession, and therefore capital, 
and at another time a pleasure vehicle, and therefore a con- 
sumers' good. Many other objects may be so close to the divid- 
ing line as to puzzle us at times, but the great mass of the 
objects with which we are concerned are easily classified. 

Capital, like consumers' goods, comes into existence through 
the application of labor, ingenuity, and forethought to natural 
objects. But there is one thing which enters into the pro- 
duction of a piece of capital which does not enter to the same 
degree into the production of a consumers' good, — that is, 
waiting, or abstinence. If you labor to make a tool for your 
own use, you do not reap the reward of your labor until the 
tool has been completed and has been used for a time in 
adding to your production. You have postponed your con- 
sumption. If you sell the tool to someone else, you may at 
once spend the money you receive for it and avoid waiting. 
But the one who bought it of you now has to wait, since he 
has given up the opportunity to spend the money for con- 
sumers' goods and must now abstain until the tool begins 
to bring him in an income. 

When production exceeds consumption, capital is increased. 
From the foregoing it will appear that the accumulation of 
capital depends in a very direct manner upon the character 
of the people. Unless the nation consumes less than it pro- 
duces, it is impossible that capital should increase at all. Even 
if accumulation should take the form of saving money, it would 
still be necessary for all the people to live on the consumers* 
goods produced by a part of them in order that the rest of 
them might devote their time to the making of tools and other 
producers' goods. That would be necessary even in a commu- 
nistic society. In our present economic system any individual 
who can live on less than his income may spend the balance 
of it on tools and other producers' goods. That which he 
spends for consumers' goods virtually hires men to produce 
that class of goods, while that which he spends for producers^'' 



lOO PRINCIPLES OF POLITICAL ECONOMY 

goods virtually hires men to produce that class of goods. The 
more money there is spent for producers' goods, the more 
rapidly they will accumulate. This means that the more thrifty 
the people are, and the more inclined they are to live on less 
than their incomes and to spend the balance for tools, the 
better equipped with tools they will be. 

We now see how definitely the prosperity, power, and great- 
ness of a nation depend upon the three factors, labor, land, 
and capital. A nation whose people are possessed of high 
average natural ability, whose educational system trains that 
ability (especially for those fields of work where ability is most 
needed), which has an abundance of rich land, and which accu- 
mulates capital rapidly, so as to supply itself with the best of 
tools and other equipment, has all that is needed on the physical 
side to make it prosperous. But much remains to be said in 
detail about each of these factors and the ways in which they 
are to be combined. 



CHAPTER IX 

THE QUALITY OF THE PEOPLE 

Why man rules over the rest of the animal creation. In 

attempting to discuss the quality of the people, we are not 
necessarily entering upon a discussion of the whole field of 
physiology, psychology, and morals. There are certain out- 
standing qualities which man possesses in greater degree than 
the brutes, which civilized man possesses in greater degree 
than the savage, and which, in any civilized community, the 
more successful classes possess in greater degree than the 
less successful. There are other qualities, such as muscular 
strength, which the brutes, many of them at least, possess in 
greater degree than man. If these were the important qualities, 
man could scarcely claim superiority over the brutes. There 
are other qualities, such as the sense of smell and the ability 
to endure pain, which certain savages seem to possess in greater 
degree than civilized man. If these were the important quali- 
ties, civilized man could scarcely claim superiority over the 
savage. Some savage races seem even to possess certain moral 
qualities in greater degree than civilized men. Travelers have 
frequently praised the honesty of certain tribes, their fidelity 
to their friends, their courage, and their fortitude. Civilized 
nations are each possessed of certain characteristic vices which 
can scarcely be apologized for, much less defended. One who 
thinks that the peculiar virtues of the savage and the peculiar 
vices of the civilized man are the important virtues and vices 
will certainly reach the conclusion that the savage is really 
superior morally to the civilized man. But it is very easy to 
be mistaken in one's emphasis. We need to consider carefully 
what qualities really give superiority to a people. 

lOI 



I02 PRINCIPLES OF POLITICAL ECONOMY 

Our present problem is to form some sort of intelligent 
opinion as to the qualities which a people need in order to 
become prosperous, powerful, and great in an economic and 
worldly sense. The following outline is suggested as express- 
ing a tentative opinion on this subject. Whatever may be 
said on purely religious or moral grounds, a nation whose 
people are possessed of these qualities in superior degree will 
have an economic advantage, other things equal, over a nation 
whose people possess them in less degree. 

THE CHARACTERISTICS OF A CAPABLE RACE 

1. Knowledge of 

a. The physical environment 

b. The social environment 

2. Forethought, as shown by 

a. Industry 

b. Thrift 

3. Dependableness, made up of 

a. Honesty 

b. Sobriety 

c. Courage 

d. Fidelity 

4. Reasonableness, as shown by 

a. Eagerness to learn 

b. Obedience to law 

c. Willingness to cooperate 

Man has achieved ''dominion over the fish of the sea, and 
over the fowl of the air, and over the cattle, and over all the 
earth, and over every creeping thing that creepeth upon the 
earth " by reason of certain powers or qualities which he pos- 
sesses in higher degree than they. These are, first, his greater 
knowledge of and control over the forces of nature ; second, 
his greater forethought in making provision for the future and 
working for distinct ends; third, his greater power of organi- 
zation, or teamwork. This power of organization is the result 
mainly of two factors, his dependability and his reasonableness. 
The same powers, or qualities, have given the civilized man 



THE QUALITY OF THE PEOPLE 103 

dominion over the savage, and the intellectual man dominion 
over the ignorant man. In the future, as in the past, we must 
expect that the world will be ruled by the nations which possess 
these qualities in the highest degree. 

Physical advantages over the brutes. Man's erect posture, 
leaving his hands free to be used for other purposes than 
for locomotion, must be counted as a great advantage over 
the brute creation. A thumb which opposes the fingers and 
gives him a better grasp adds greatly to this advantage. These 
advantages, however, would not count for much if he did not 
have a mind which enabled him to devise tools to be grasped 
and used with his thumbed hands. So far as the upright pos- 
ture and the thumb are concerned, while they give him an 
advantage over the brutes, they alone do not give the civilized 
man any advantage over the savage. The posture of the 
savage is as upright, and his thumb as handy, as the civilized 
man's. In seeking, therefore, the advantages which have given 
the civilized man dominion over the savage we must look at 
the mental and moral qualities. These are not necessarily 
physiological in their nature ; they may be mainly the results 
of accumulated history, tradition, and training. 

Intellectual advantages of civilized men over savages. 
Knowledge of the forces of nature may almost be said to 
include control over them, though the erect posture and the 
thumb assist in that control. Our physical environment includes 
not only the physical objects which surround us but their 
properties and the forces which govern them as well. To 
know our physical environment, therefore, means to know 
the properties of matter and the forces which operate in and 
through, it. In short, this is scientific knowledge. It is this 
which underlies all our mechanical improvements. Our social 
environment includes human beings and all their powers, 
characteristics, habits, emotions, etc. A knowledge of one's 
social environment includes such a knowledge of man and his 
ways as to enable one to work with other men comfortably, 



I04 PRINCIPLES OF POLITICAL ECONOMY 

knowing what to expect and what to depend upon. This is 
particularly important in those who are intrusted with the work 
of governing or administering the affairs of government. 

Forethought. Forethought is only one aspect of what may 
be called the time sense. Among the many definitions of man 
is one which says that he is the being " who looks before and 
after." His memory of the distant past and his forethought 
for the distant future modify his actions in the immediate 
present more than the actions of any other creature are modi- 
fied. But the past cannot be changed ; only the future now 
Hes within our control. Even industry is chiefly carried on 
because of the vivid appreciation in the present of those needs 
which are certain to arise in the future. Those creatures 
which appreciate future needs most vividly will, of course, 
labor most assiduously. The same difference shows itself 
among men. Those nations, as well as those individuals, who 
see most clearly in advance what their future needs are likely 
to be are the nations and the individuals who show the greatest 
industry as well as the greatest thrift. 

There is a story of an aged savage who, after having lived 
in civilized communities most of his life, returned in his old 
age to his native tribe, saying that he had tried civilization for 
forty years and that it was n't worth the trouble. Much of the 
philosophy of civilization is summed up in that remark. Civ- 
ilization consists largely in taking trouble. Genius, in the indi- 
vidual, has been said to consist in the capacity for taking 
infinite pains in one's work. It is this capacity which marks 
the superior race as well as the superior individual. They 
who find the taking of pains too burdensome to be borne 
will naturally decide that civilization is not worth the trouble. 
They who do not find it so very burdensome to take pains 
will naturally decide that civilization is worth the trouble, and 
will therefore become civilized. 

This principle applies to every stage of civilization and 
progress. The greatest advancement is made by those who 



THE QUALITY OF THE PEOPLE 105 

are capable of taking the greatest pains. It applies especially 
to agricultural progress. It is more trouble to select than not 
to select seed, and to select it in the field than in the bin. It 
is more trouble to test cows than not to test them, to keep 
accounts than not to keep them, to diversify or rotate crops 
than not to diversify or rotate, to mix fertilizers intelligently 
than to buy them already mixed, to cooperate with one's pig- 
headed neighbors, especially if one is one's self a little pig- 
headed, than to work alone. It is also more profitable. In all 
these and in a multitude of other cases it is found that it pays 
to take trouble. 

Thrift. Thrift differs from industry in that it consists in 
saving that which is already produced or possessed, whereas 
industry consists in producing or gaining possession of desir- 
able objects. Even more than industry, thrift is a mark of 
forethought. It requires an even stronger self-control, combined 
with a keener sense of the importance of future needs, to lead 
one to refrain from consuming that which is already produced 
than it does to work to produce that which does not yet exist. 
However, the two things must always go together, in the com- 
munity at least if not in the individual. The farmer, that is, 
some farmer, must at least save seed (which means that he 
must refrain from consuming it) before any farmer can labor 
successfully at the growing of next year's crop. One may, 
however, save the seed which another plants. There are some 
savages so thriftless as not to be able even to save seed. 
Needless to say, their industry, even if they were industrious, 
would not count for much. If cattle are benevolently given to 
them, they kill them all in time of scarcity. Therefore they 
cannot succeed even as herdsmen but fall back into a lower 
economic stage, namely, hunting and fishing. Such people are 
not likely to grow powerful enough to occasion much uneasiness 
to the rest of the world. Even if there were no other reasons 
for their weakness, they could never support numbers enough 
to be very strong. 



I06 PRINCIPLES OF POLITICAL ECONOMY 

Knowledge and forethought are primarily mental qualities, 
though there is an element of morality in forethought ; depend- 
ableness and reasonableness are primarily moral qualities, 
though there is an element of mentality in both of them. 
In this age of great mental achievements, especially in the 
fields of physical science and mechanical invention, there is a 
tendency to underestimate the importance of moral qualities. 
This tendency may have been increased by the perception 
that moral teachers themselves have sometimes overemphasized 
the lesser virtues (that is, those which count least in the 
improvement of social life) and underemphasized those which 
count most. 

Moral advantages of civilized men over savages, — depend- 
ableness. Nothing can be more important in the building of 
a great and prosperous nation than dependableness. Many 
writers have taken pains to point out how dependent we are 
upon one another in a highly civilized state. One way of 
illustrating this mutual dependence is by comparing a highly 
developed society to a complicated machine or a highly devel- 
oped animal organism. There are many striking resemblances, 
among the most important of which is the interdependence of 
parts. This interdependence of parts increases as we ascend 
in the scale of organic life. In the human body, for example, 
or in that of any of the higher mammals, the interdependence 
of parts is much greater than that found in the bodies of the 
lower forms of life. The same change is noticeable as we 
ascend in the scale of social life. Each individual tends to 
specialize in some particular kind of work and to depend upon 
other individuals, who have specialized on other kinds of work, 
to supply him with goods and services which he cannot produce 
for himself. Some of the reasons why this is so advantageous 
will be discussed in the chapter The Division of Labor. 

There can be no great amount of dependence of one upon 
another where the people are not dependable. This is equally 
true of a machine or an animal organism, but we do not 



THE QUALITY OF THE PEOPLE 107 

attribute moral qualities to the parts of any of them. The 
wheel in a machine has no choice. It must of physical neces- 
sity do whatever its construction requires it to do. But if the 
machine be not well made, so that some part is not compelled 
to work harmoniously with every other part, the whole machine 
will work very imperfectly or not at all. Similarly, if one 
part of the animal organism, especially of a highly developed 
organism, should fail to perform its functions, every other 
part is likely to suffer, and the whole organism may even die. 
There is no physical necessity compelling a person to be de- 
pendable, as is the case with the parts of a well-made machine 
or the organs of a healthy body ; but it is just as important 
that he should be. That is why dependableness is such an 
important quality of the people, and why it becomes increas- 
ingly important as civilization advances. In fact, without it 
civilization cannot advance at all. 

Our mutual dependence is of various sorts and degrees. If 
someone fails to do that which he is expected to do, he may 
imperil the lives of hundreds or thousands of his fellow men, 
as in the case of a switch tender or a locomotive engineer ; 
he may occasion the loss of valuable property ; or he may, as 
in the case of an unpunctual person, merely upset our calcula- 
tions and cause many of us to waste our time waiting for him 
or guessing what he is likely to do. In all these cases, in 
greater or less degree, he occasions loss to the nation. The 
time we waste on account of his lack of dependableness is as 
truly a loss as the property which is destroyed. Aside from 
the direct loss of time and property, there is the greater loss 
which comes from the discouragement of enterprise, the lack 
of confidence, and the general demoralization which ensues 
when men can no longer rely upon one another. 

Honesty. The first element in dependableness is common 
honesty. Men who will not keep their word, fulfill their con- 
tracts, or do business without cheating, are not only morally 
odious ; they are also obstructions to the progress and prosperity 



io8 PRINCIPLES OF POLITICAL ECONOMY 

of the community. Perhaps this is why they are morally 
odious. A community made up of such people, no matter how 
gifted they might be mentally, could scarcely prosper. No one 
could trust anyone else ; consequently there could be no credit. 
Nothing could be bought or sold without the closest and most 
minute inspection, and this would be laborious and therefore 
wasteful of time. There could be no cooperation or teamwork, 
but everyone would have to look after himself and spend a 
great deal of .time watching his dishonest neighbors. Among 
the many advantages of honesty, therefore, not the least is 
that it is a great labor-saving device when it is practiced 
throughout a community. Of two communities which are 
otherwise equal, the one within which honesty prevails will 
advance more rapidly in prosperity and power than the one in 
which dishonesty prevails. 

Sobriety. Next to honesty, sobriety is probably the most 
important element in dependableness. In a rudimentary state 
of society, where each individual works and acts most of the 
time alone, and where, therefore, there is little interdependence, 
drunkenness may not be so vicious as it has now become. In 
our interlocking civilization no personal habit or vice so unfits 
a man for usefulness as drunkenness. If you had to take 
your choice between riding behind a locomotive engineer who 
was addicted to drunkenness and riding behind one who was 
addicted to any other vice, there is not much doubt as to 
which you would choose. If you had to take your choice 
between a chauffeur who was in the habit of getting drunk and 
one who had formed any other bad habit whatsoever, you 
would not be likely to take the drunkard. Apply a similar 
test to anyone in any of the hundreds of responsible positions 
(and all positions are coming to be responsible positions) and 
you will reach the conclusion that the person who is ad- 
dicted to drink is about the least desirable citizen you can 
name. There are fewer places where he is of any use and 
more where he is a menace than is the case with the victims 



THE QUALITY OF THE PEOPLE 109 

of any other vice. Whatever you may think when you are 
discussing, in the abstract, the relative harmfulness of various 
vices, you are not Hkely to be much in doubt when you come 
to a concrete case hke that of a locomotive engineer, a switch- 
man, a driver of an automobile, or even a janitor or anyone 
else whose lack of dependableness might endanger your life. 
Sobriety must obviously rank high among the virtues which 
go to make up what we have called dependableness. 

Courage. Courage is the father of many virtues, as fear is 
of many vices. It is probable that as many falsehoods result 
from fear as from malice. In any kind of emergency you 
will want dependable companions who will not fail you. Their 
dependableness will be in proportion to their courage. Even 
your own courage may depend partly upon their courage, and 
theirs upon yours ; that is to say, when you feel that you can 
rely upon one another, you will all feel more courageous and 
more capable of coping with a difficult situation than if each 
of you doubts the courage of the others. This applies not 
only to physical courage in a time of physical danger, but to 
moral courage in times when the larger interests of society 
are at stake. Men of weak courage fear to come out on the 
right side, and even men of real courage have their confidence 
shaken by the feeling that they cannot depend upon their 
fellow citizens. 

Fidelity. Fidelity is closely related both to honesty and to 
courage, and serves much the same purpose. It is the quality 
which keeps faith even though one might gain some individual 
advantage by breaking faith. The habit of breaking faith or 
abusing confidence demoralizes a group or a community and 
makes any kind of effective teamwork impossible. 

There are doubtless many other elements which contribute 
to the dependableness of a people, but these four are the 
principal ones. Any group of people who possess these 
four in high degree can rely upon and cooperate with one 
another and carry out any form of teamwork which they have 



no PRINCIPLES OF POLITICAL ECONOMY 

the intelligence to plan. A community whose people are weak 
in any one of these four qualities will have difficulty in carry- 
ing out any effective scheme of group action, no matter how 
clearly they perceive the advantage of doing so. While these 
are moral qualities, they are nevertheless qualities upon which 
the economic prosperity of the nation depends. They are 
therefore of just as much interest to the economist as good 
tools, good land, or any other factor. 

Reasonableness. Reasonableness is a noticeable characteristic 
of progressive people, as its absence is of unprogressive people. 
It includes freedom from prejudice, passion, and superstition, 
willingness to take a sensible view of things and to be guided 
by sound judgment rather than by stubbornness and general 
contrariness. It is opposed equally to the slavish following of 
old customs, on the one hand, and blind and headlong pursuit 
of new fads, on the other. It involves a frank recognition of 
all the necessary conditions of social life and teamwork, and 
a willingness to submit to those conditions even at some 
inconvenience to self. It involves the willingness to help in 
any genuine reform movement even at some inconvenience 
to self, and likewise a recognition of the necessary and legally 
constituted methods of effective reform. 

Teachableness. The first element in reasonableness is 
teachableness, or eagerness to learn, especially to learn better 
ways of doing the work which we have to do. Travelers 
among backward races give many strange accounts, not simply 
of the ineffective methods of work, which we might expect, 
but of the unwillingness of the people to learn new ways even 
when they are shown. One railroad builder who was forced 
to employ native labor in a backward country, which need not 
be named, found that they were accustomed to carry all burdens 
on their heads. In moving dirt they insisted even on carrying 
it in boxes and various receptacles on their heads. He supplied 
them with wheelbarrows and gave orders that they were to 
use these and nothing else. " They used the wheelbarrows, but 



THE QUALITY OF THE PEOPLE ill 

carried them also on their heads, and nothing could induce 
them to change their immemorial custom. Another story 
from another backward country relates how an enterprising 
American undertook to substitute some well-made American 
carts for the exceedingly clumsy and inefficient carts then in 
use. The native teamsters refused to adopt the innovation, 
giving as their reason that the new carts were too silent, that 
they missed the screeching made by the wheels turning on the 
heavy wooden axles of their old carts. Similar illustrations 
could be repeated by the hundred if necessary. No nation 
whose people are so unteachable as these illustrations indicate 
is likely to become prosperous, or great in any sense, no matter 
how well endowed it may be with natural resources. Such 
nations will always remain at the mercy of the stronger nations 
and will survive only because their stronger neighbors show 
enough moral self-restraint to refrain from conquering them. 

This difficulty is not simply a lack of knowledge. It is more 
fundamental than that. It is a habit of mind which resists 
knowledge, — which refuses to accept knowledge even when 
it is presented. Whether this is due to some defect in the 
physiology of the people or merely to bad teaching in the 
past, it may be difficult to determine. That there are constitu- 
tional differences of this kind among peoples there can be 
little reasonable doubt. To some the pain of a new idea is so 
considerable that they prefer to endure poverty and hardship 
rather than the painful process of learning better ways of doing 
things. To others the painfulness of learning is so slight as 
to place no obstacles in the way of progress. On the other 
hand, a wise but strong ruler who would establish a system of 
compulsory education and rigidly enforce it could doubtless 
accomplish a great deal in the way of increasing the teachable- 
ness of the people. During their enforced schooling they 
would form the habit of learning, and the pain of a new 
idea would be greatly reduced. A wise majority in a democracy 
might do the same thing for an unwise minority. 



112 PRINCIPLES OF POLITICAL ECONOMY 

Even in what passes for a progressive nation, and 
among people who are ranked as moderately intelligent, there 
survive many practices which can only be regarded as super- 
stitions. Some farmers still plant their potatoes in the dark of 
the moon rather than when the soil and the weather conditions 
are right. Others observe ceremonies of various kinds which 
have not the slightest relation to the laws of plant or animal 
growth. Still others refuse to submit to rules or to adopt 
practices which have been proved to have scientific value, 
either because it is contrary to their religion or because it is 
not the way they and their fathers have always done. Among 
others besides farmers there is sometimes a prejudice against 
''book learning" even after the book learning has proved 
itself a practical thing. 

Covetousness. There is another form of unreasonableness, 
and it is probably the most destructive of all, which takes the 
form of jealousy or resentfulness at the success of other people. 
It is the worst form, perhaps the only real form, of covetous- 
ness. There are few things which so deaden the enterprising 
and constructive spirit of a people as this form of resentfulness, 
and there are few things which so encourage that spirit as 
a generous appreciation, on the part of everyone, of real 
achievement wherever it is found. 

Obedience to law. Another important element in reasonable- 
ness is the recognition of the fact that if we are going to live 
together in groups, it is necessary for each of us to submit to 
many regulations, some of them at times irksome, which would 
be unnecessary if we could live as isolated individuals. This 
is commonly called obedience to law. This need not be a 
slavish acceptance of all laws as they now stand, but it at 
least involves a recognition of the orderly and legally constituted 
methods of changing laws, rather than a stubborn and brutal 
defiance of those which we do not happen to like. The pur- 
pose of law is not to repress or obstruct, but to make free, — 
to release energy. The traffic policeman on a crowded street 



THE QUALITY OF THE PEOPLE 1 13 

corner may be taken as a good illustration of all enforcement 
of law. He is not there to obstruct or hinder traffic, though 
he does undoubtedly hinder some unreasonable people from 
doing what they would like to do. But as the result of such 
hindrances, traffic can move more freely than it could without 
them, and thus the average person actually enjoys greater 
freedom of movement than would otherwise be possible. A 
reasonable person always recognizes this fact and submits to 
such regulations. Only an unreasonable person finds them 
irksome or refuses a willing obedience. 

The world has generally been dominated by peoples who 
were law-abiding. No nation whose people refuse to submit 
to the necessary regulations could ever hope to grow prosperous 
or powerful enough to play much of a part in civilization. It 
would be as reasonable to expect a disorganized mob, each 
individual of which followed his own whims, to succeed against 
a well-organized and well-disciplined army. The type of disci- 
pline and regulation is different, but the necessity is just as great 
in a nation at peace as in a nation at war. The results of a 
lack of discipline come more quickly in war than in peace, 
but they are no more certain in the one case than in the 
other. It is particularly important that this kind of reasonable- 
ness shall exist in a democracy. Under a despotism the 
subjects may be compelled by fear to submit to regulations ; 
in a democracy it must be largely voluntary. In other words, 
it depends upon the reasonableness of the people. 

Willingness to cooperate. Willingness to cooperate where 
cooperation is desirable, even without legal compulsion, is a 
very important factor in the prosperity of any community. 
Even where everyone agrees that cooperation is needed, it is 
frequently difficult to get people to cooperate for community 
work. The reasons are many, and some of them are hard to 
understand. Personal jealousies, old grudges, mutual distrust, 
and even general all-round meanness are given as the prin- 
cipal reasons. It is sometimes said that the lack of leaders is 



114 PRINCIPLES OF POLITICAL ECONOMY 

the great difficulty. It is quite as frequently the lack of fol- 
lowers. Everyone wants to be a leader and is not willing to 
follow anyone else. One of the vices of democracy shows 
itself in many cooperative enterprises. Instead of supporting 
a leader who really knows what ought to be done and how to 
do it, it frequently happens that the only leader who can win 
support is the one who can wheedle the different factions into 
a cooperative mood. His fitness does not consist in the fact 
that he is an expert in the work which is to be done by the 
group, but in the fact that he is an expert in the arts of per- 
suasion, — that he is the only one who can overcome the 
unwillingness of the various factions to cooperate. If they 
were willing to cooperate, this sort of leader would not be a 
necessity, and they could then choose a leader who was an 
expert in the work to be done. 

Even in the larger sense, the nation is weak if it must be 
led by one who knows very little about the actual business in 
hand, but knows only how to placate various factions and per- 
suade them to undertake the work before them. With such a 
spirit among the people the indispensable man is more likely 
to be the orator or the persuader than the statesman or the 
administrator. A people among whom the efficient man 
is popular will never be outstripped in the arts of peace, 
or beaten in war, by a people among whom only a dema- 
gogue or even a persuasive orator can be popular. A people 
who lack the willingness to cooperate in the carrying out of 
great national plans and programs must be persuaded or 
wheedled. Lacking a despot, their first need is for someone 
who can wheedle them into doing that which they ought 
to be willing to do without wheedling. Nothing more unerr- 
ingly indicates the quality of the people than the kind 
of leaders they pick out or follow. If they habitually allow 
themselves to be led by men who are proficient merely in 
the arts of persuasion, they are a weak people. Even that 
which is sometimes called executive ability, and which is too 



THE QUALITY OF THE PEOPLE 115 

often a convenient excuse for much stupidity, is made neces- 
sary mainly because people are too weak and vacillating to do 
what they ought to do without a great deal of looking after. 
If the people choose as their leaders men who have clear and 
sound ideas and marked scientific or constructive ability, re- 
gardless of their proficiency either in the arts of persuasion or 
in the bluster of the '' great executive," they are a strong 
people. As the late William James pointed out, one of 
the purposes of an education is to enable us to pick out a 
good man. 

If we are clear in our minds as to a few of the leading quali- 
ties which a capable race must possess, the next question is. 
How may a nation improve or preserve its capacity for great- 
ness } Our original qualities depend mainly upon heredity ; our 
acquired qualities, upon education. Education depends mainly 
upon the educational system and the advantages which civiliza- 
tion provides for the accumulation and transmission of knowl- 
edge. Few of us, unless we have thought seriously about it, 
realize how much of our present knowledge is due to the art 
of printing. By means of the printed book the knowledge 
acquired by one generation may be stored up and bequeathed 
to future generations. Without the printed book it would 
have to be transmitted from generation to generation on the 
thin air by means of the spoken word. Much that is wonder- 
ful has been transmitted orally, but much has also been lost. 
Such a thing as a lost art is scarcely possible in this age 
of printing presses. But, while much of our knowledge is 
due to the art of printing, more perhaps is due to the organ- 
ized plans for training each generation during its growing 
period. A school system which gives each and every child 
just the training which he needs to fit him for the greatest 
usefulness is the dream of all educators. 

Heredity and training. A great deal has been written re- 
garding the comparative importance of heredity and training 
in the determination of ability and character. Some have gone 



Ii6 PRINCIPLES OF POLITICAL ECONOMY 

to the extreme of saying that heredity is everything, that a 
genius will always become a genius in spite of the lack of 
educational advantages, — in short, that he will find his own 
means of education. Others have gone so far as to deny that 
heredity has anything to do with a man's ability ; they claim 
that it is all in his education, including under education all the 
influences which have been at work since his birth in develop- 
ing his mind or shaping his character. The truth, as in most, 
such cases, seems to be somewhere between these extremes. 
There is no doubt whatever that men of average natural 
ability may be greatly improved by education and training, 
nor is there any reasonable doubt that some are capable of 
being trained much more highly than others because of a 
difference in natural ability. 

If we consider certain special fields of study, — for example, 
music or mathematics, — few will doubt that there are differ- 
ences in natural talent for these studies.. Any normal person 
can acquire some skill in either of these fields, but there 
are some who are so deficient in natural talent for one or 
the other that no amount of training would ever enable them 
to become highly proficient. There is a strong probability 
that the same may be said of any special kind of ability or 
skill which might be named ; but in our complex civilization 
so many kinds of ability and skill are required that almost 
anyone can find some field of work in which he may excel, 
though there may be no good market for the kind of work in 
which he excels, or there may be so many others possessing 
the same kind of ability as to overstock the market. In either 
case the individual, however skillful or capable in that special 
field, may find it hard to make a living. 

Whatever may be said regarding the relative importance 
of the natural ability of the people and their training, it is 
absolutely certain that it is more important for the present 
generation to give attention to the problem of its own training 
than to the problem of its own heredity. The latter cannot 



THE QUALITY OF THE PEOPLE 117 

now be changed, and there is no use worrying about it. The 
only thing to do is to make the most of its inheritance and 
see that it gets the best possible training. But when we look 
to the future, there is much to be said in favor of giving atten- 
tion to the question of the heredity of future generations. If the 
most capable men and women of this and succeeding genera- 
tions marry and have larger families than the less capable, and 
if the least capable, the feeble-minded, and the defective are 
prevented from reproducing their kind, we may expect a 
gradual improvement, generation after generation, in the native 
and inherited quality of the stock. If, on the other hand, 
many of the most capable do not marry at all, and if the others 
marry late and have small families, whereas the less capable 
have larger families, while the feeble-minded and defective 
multiply most rapidly of all, we must expect a gradual 
deterioration in the stock, generation after generation. 

The age of marriage. Aside from the difference in the size 
of families, the mere difference in the age of marriage will 
make a great difference in the rate of increase of different 
classes. Let us suppose, for example, that there are two 
groups of people, which we will call groups A and B, contain- 
ing a thousand persons each, each group having different 
habits with respect to the age of marriage. In group A mar- 
riages take place so early, on the average, that there is an 
average of twenty-five years between generations. That is, the 
average parent is just twenty five years older than the average 
child, enough children being born before the parents are 
twenty-five to balance those who are born afterward. In group 
B, on the other hand, marriages take place so late that there 
is an average of thirty-three and a third years between genera- 
tions. Let us assume, further, that the number of children 
brought to maturity in the average family is the same in the 
two groups, and that this average number is four ; that is, 
in both groups the average married couple brings four children 
to maturity and marries them off. The total number in each 



Ii8 PRINCIPLES OF POLITICAL ECONOMY 

group, therefore, doubles in each generation. But group A 
will double four times in a hundred years, whereas group B 
will double only three times. Under these circumstances 
group A will have increased from one thousand to sixteen 
thousand at the end of a hundred years, whereas group B will 
have increased to only eight thousand. If, in addition to this, 
group B should have fewer children on the average, so that 
they doubled only once in two generations, the contrast is still 
greater. In this case they would number only three thousand 
at the end of a hundred years. If, through so many failing to 
marry at all, and the rest having so few children, they should 
not increase at all from generation to generation, the two 
groups, at the end of the century, would bear the ratio of 1 6 to i . 
Now it is rather obvious, is it not, that it makes a great deal 
of difference whether group A represents the more capable 
men and women in our nation, and group B the less capable, 
or vice versa. 



CHAPTER X 

THE DIVISION OF LABOR 

As suggested in Chapter VIII, labor, land, and capital are 
the elements out of which national prosperity is built. Of 
these by far the most important is labor, since we include 
under that term both mental and physical exertion. It was 
also stated that the efficiency of labor depends upon two factors : 
the natural ability of the people and their training. But there 
are many things invplved in training which are not taught in 
schools or learned in shops or business houses. The general 
attitude of mind of the whole people, their outlook on life, 
their personal habits, their systems of morals, and even their 
religion, all have their share in the efficiency of the people. 
The efficiency of labor depends also, to a large degree, upon 
its organization and the opportunity for specialization. 

Adam Smith begins his great '' Inquiry into the Nature and 
Causes of the Wealth of Nations " with a discussion of the 
division of labor. Other writers, both ancient and modern, 
had commented on the great fact of interdependence of indi- 
viduals in society, but no one had gone into such detail or 
shown so clearly just why a minute division of labor was so 
advantageous. His statement of the case has scarcely been 
improved upon up to the present day, though many of his 
illustrations are out of date. 

Meaning of the division of labor. By a division of labor he 
means, first, a system under which no one produces everything 
he needs; but each one confines himself to the production of 
that one thing or those few things for the production of which 
he is best fitted, exchanging his surplus product for the surplus 
products of others who are specializing on other things ; second, 

119 



I20 PRINCIPLES OF POLITICAL ECONOMY 

the process of dividing up the work involved in the making of 
a given article (each man performing a single part) and then 
assembling all the parts, producing a complete whole. He 
mentions the nail makers of his day as illustrations of the first 
form. A common blacksmith having many other kinds of 
work to do could never become very skillful at nail making, 
but one who did nothing else except to make nails became 
very skillful and could make in the course of a day several 
times as many as a common blacksmith. He mentions boys 
under twenty, who had never learned any other trade, who 
could make, each of them, upwards of two thousand three 
hundred nails in a day, whereas a common smith, even though 
he were accustomed to making nails occasionally, could sel- 
dom make over eight hundred or a thousand in a day. The 
second form of the division of labor was found in his day in 
the making of pins. The work of making a pin was divided 
into eighteen different operations, each operation being per- 
formed by a different workman. Of course, neither nails nor 
pins are made nowadays as they were in his day; but the 
division of labor has been carried even farther. They are 
turned out by automatic machines, but the machines are made 
by one set of men, and the metal is mined, smelted, and 
prepared by different groups ; all are performing parts of the 
work of making nails or pins, as the case may be. Thou- 
sands of other illustrations lie all about us if we choose to 
look for them. 

Advantages. Adam Smith names three distinct advantages 
which result from the division of labor : 

First, the improvement in the dexterity of the workman necessarily in- 
creases the quality of the work he can perform ; and the division of labor, 
by reducing every man's business to some one simple operation, and by 
making this operation the sole employment of his life, necessarily increases 
very much the dexterity of the workman. . . . Secondly, the advantage 
which is gained by saving the time commonly lost in passing from one sort 
of work to another, is much greater than we should at first view be apt to 
imagine it. It is impossible to pass very quickly from one kind of work to 



THE DIVISION OF LABOR I2I 

another that is carried on in a different place and with quite different tools. 
. . . Thirdly and lastly, everybody must be sensible how much labor is 
facilitated and abridged by the application of proper machinery. It is un- 
necessary to give any example. I shall only observe, therefore, that the 
invention of all those machines by which labor is so much facilitated and 
abridged, seems to have been originally owing to the division of labor. Men 
are much more likely to discover easier and readier methods of attaining 
any object, when the whole attention of their minds is directed towards that 
single object, than when it is dissipated among a great variety of things. 
But, in consequence of the division of labor, the whole of every man's 
attention comes naturally to be directed towards some one very simple 
object. It is naturally to be expected, therefore, that some one or other of 
those who are employed in each particular branch of labor should soon 
find out easier and readier methods of performing their own particular 
work, wherever the nature of it admits of such improvement. A great part 
of the machines made use of in those manufactures in which labor is most 
subdivided, were originally the inventions of common workmen.^ 

Adam Smith's opinion that the third and last of these ad- 
vantages was of special importance has been fully justified by 
subsequent experience. Those special phases of the division 
of labor which he so aptly illustrated by the nail makers and 
the pin makers of his day scarcely exist now except in some 
minor industries. The nail and pin makers actually made 
their products with their own hands, using only such tools as 
could be handled and driven by their own muscles. Machines 
have now taken the place of the simple tool of that day. 
Sometimes these machines are directed and fed by attendant 
laborers, but sometimes they are so perfected as to require 
very little attention, feeding themselves automatically and 
stopping automatically when anything goes wrong. In these 
cases the work of the attendant is reduced to a minimum, 
consisting merely in starting the machines and putting them 
in order when anything goes wrong. 

Differences between a tool and a machine. The difference 
between a tool and a machine is fairly clear. The working 
part of a tool is not only driven but guided by human muscles. 

1 Wealth of Nations, Chapter I. 



122 PRINCIPLES OF POLITICAL ECONOMY 

A machine may be driven by human muscles, but the working 
part is guided by the machine itself. Besides, the power is 
not applied directly to the working parts, but indirectly through 
a series of mechanical devices such as wheels, pulleys, levers, 
cranks, etc. For example, the working parts of a sewing 
machine are the needle and the bobbin. These are guided by 
the other parts of the machine, and the power is applied 
indirectly. It is therefore a machine, even though it is pro- 
pelled by the muscles of the operator ; on the other hand, the 
needle of the tailor or seamstress is not only propelled but 
guided by the worker. The hammer of the blacksmith is a 
tool ; a steam hammer is a machine, not so much because it 
is driven by steam as because the working part, that is, the 
hammer itself, is controlled, guided, and made to strike accu- 
rately by other parts of the machine, and the power is applied 
indirectly through mechanical devices. Even in the case of a 
riveting machine, while it has to be held in place, the actual 
blows are struck in rapid succession by a striking part which 
repeats the same motion over and over again, being guided in 
its rapid motion by other parts which are made for that 
purpose. 

Advantages of machinery. The advantages of the machine 
over the tool are, first, that it makes possible the use of greater 
power than can be used to drive a tool ; second, that it can be 
driven at much greater speed. Since the working part is 
guided accurately by the mechanism and made to repeat the 
same operation over and over again, the only limit of the speed 
at which it can be driven is that fixed by the strength of the 
materials of which it is composed. A third advantage is that, 
by reason of the power which may be used to drive it, and 
of the strength of the materials of which it is composed, it 
can perform operations which no tool, whose working part 
is guided and controlled by human muscles, could perform. 
Perhaps it would be more accurate to say that it can be made 
to control working parts which are themselves too large and 



THE DIVISION OF LABOR 123 

heavy to be guided by human muscles. The working part of 
a steel rolling mill, for example, consists of the rollers. Obvi- 
ously no human hand could guide such powerful instruments, to 
say nothing about driving them. They are held in place and 
controlled by a powerful framework and, with the stupendous 
power which they have behind them, can perform gigantic feats. 

The fact that a machine is only capable of repeating one 
operation over and over again suggests a weakness. It can 
only be successfully employed where there are operations which 
have to be repeated a great many times. The fact that sewing 
involves the making of many stitches, all of them very much 
alike, makes it a suitable kind of work for a machine. The 
binding of sheaves of grain is another operation which has to 
be repeated a vast number of times in the harvesting of a 
crop ; therefore a twine binder is a practical machine. Thresh- 
ing the grain with a flail also required a constant repetition 
of the same act ; therefore we have threshing machines. In 
short, any operation which has to be repeated without variation 
a great number of times is suitable for machine work. 

Human ingenuity is now able to construct machines which 
can perform any operation, however delicate, which the human 
hand can perform. Anyone who has seen the wonderful ma- 
chines at work in a modern watch factory, for example, will 
not doubt this statement. But if it is an operation which does 
not have to be repeated continuously and a great number of 
times, it may not pay to build a machine for the purpose. It 
may be cheaper to do the work by hand. Even the darning 
of socks and the patching of trousers can be done by machinery ; 
but unless it were done on such a large scale as to keep a 
darning machine or a patching machine busy a good part of 
the time, it will be cheaper to darn and patch by hand. There 
are still a good many operations of this character, especially in 
the household and also in agriculture, the greatest of all our 
industries. Much work must still be done by hand or with tools 
rather than machines. 



134 PRINCIPLES OF POLITICAL ECONOMY 

Avoid competing with macldnes. By way of digression it 
may be pointed out that young people who are looking forward 
to an occupation should bear in mind that a machine can do 
anything which can be reduced to a routine, or a constant repe- 
tition of the same act, and that in the course of time all such 
work will probably be done by machines ; therefore any occu- 
pation requiring constant repetition ought to be avoided by 
everyone who is intelligent enough to be trained for anything 
else. No machine can think or use discretion ; therefore it 
will never be able to do any kind of mental work or any kind 
of physical work which requires judgment, discretion, taste, or 
tact. Those who do not wish to compete with machines will 
do well to train themselves to think, to use discretion, or to 
exercise taste or tact. This should be done as much in the 
interest of the nation as in the interest of one's self. The 
nation has no great need for men to do work which machines 
can do just as well. What it needs is men who can do what 
machines can never do. 

Two kinds of division of labor. As suggested above, the 
division of labor takes on a somewhat different character when 
highly developed machinery comes into general use. This 
may be explained further by pointing out two kinds of division. 
One has been called contemporaneous division of labor, and 
the other successive division of labor. Under the contempora- 
neous division of labor men are, at the same time, specializing 
in different lines of production. One group is producing, 
let us say, breadstuffs and bread, another meat, another textile 
fabrics and clothes, and so on, each group bringing some kind 
of raw material through the various stages of production, until 
it matures into a finished product ready for consumption.^ An- 
other phase of the contemporaneous division is found when 
different men are, at the same time, producing different parts 
of the same product, the parts being later assembled into a 
finished whole. Lumbermen are cutting the timber which 

1 See Taussig, " Wages and Capital," p. 6. New York, 1898. 



THE DIVISION OF LABOR 125 

eventually goes into a house, while men in the ore beds are 
getting out the iron ore which eventually goes into the house 
in the form of nails, while still other workmen are making the 
brick or quarrying the stone which will eventually go into the 
foundations and the chimneys. 

By the successive division of labor different sets of men are 
working on the same material, bringing it forward through the 
successive stages of maturity. Thus, following the' choppers 
who fell the trees come the sawyers who saw them into rough 
boards, the carriers who transport the boards, the men in the 
planing mill who plane them, and so on, until the carpenters fit 
them into their places in the house. The iron ore goes through 
another series of stages, as does every bit of material which 
enters into the final product. 

The lengthening of the process. This lengthening out of 
the process of production, making it extend over a longer 
period of time, is one of the most striking characteristics of 
the era of machine production. It calls for more foresight, 
more planning for the distant future, more expenditure of 
labor and investing of capital long in advance of the consump- 
tion of goods, than was ever necessary or possible in any pre- 
vious age. There is, therefore, under this regime, a greater 
demand for foresight, for thrift, for courageous investment, 
for the hazarding of large sums on the chance of gains in 
the distant future, than ever before. There may be some con- 
nection between this fact and the fact that the large rewards, 
in our day, go to the men who exercise foresight, who invest 
courageously and wisely, who hazard their time and wealth on 
enterprises which can only bear fruit at some distant day in 
the future ; but to do these things successfully and safely re- 
quires great wisdom. Some, however, lacking wisdom, may 
blunder into success ; but those who blunder are much more 
likely to blunder into failure. 

The contemporaneous division of labor has to do with space ; 
that is, it involves the doing of different kinds of work in 



126 PRINCIPLES OF POLITICAL ECONOMY 

different places at the same time. This calls for the coordination 
of that labor and the exchange of products in order that each 
specialist or specialized group may get the advantage, not only 
of its own efficiency, but of that of other specialists and spe- 
cialized groups. Where different workers are, at the same time, 
but in different places, working on different parts of the same 
product, it is necessary that someone should coordinate their 
work. In a great automobile factory, for example, there are 
many different parts being produced simultaneously. In order 
that these parts may all be assembled and fitted together, there 
must be very careful planning and organization. This is what is 
meant by the coordination of labor performed in different places. 
The time element. The successive division of labor has to 
do with time ; that is, it involves doing, at different times, by 
different men, different parts of the work of completing an 
article. In the same automobile factory the same piece of 
material is worked upon by many men in a regular order 
of succession. This calls for the coordination of labor per- 
formed at different times. The lengthening out of the process 
of production in the whole of modern society makes this form 
of coordination peculiarly important. Its greatest importance, 
however, is found outside any individual factory. Before the 
automobile factory could be built, there must have been much 
work done in procuring the raw materials for the building and 
the machines, in producing food and clothing for laborers, and 
in doing a multitude of other things. Similarly, before shoes 
can be made, cattle must be raised, slaughtered, and their hides 
tanned ; shoe factories must be erected and equipped with prod- 
ucts from the mines and forests, and a vast amount of prepa- 
ration made in other ways. The labor of the herdsman must 
be coordinated with that of the clerk in the shoe store ; other- 
wise we should not have shoes as we now have them. Unless 
this coordination is brought about, the same man would have 
to kill the animal, skin it, tan the hide, and go through all the 
processes necessary to the finishing of a pair of shoes. 



THE DIVISION OF LABOR 127 

Territorial division of labor. In one of its broader aspects 
the contemporaneous division of labor is known as the terri- 
torial division of labor. This is what takes place when one 
region produces that for which it is best fitted, and exchanges 
its surplus for the surplus of other regions which are also spe- 
cializing on those products for which they are best fitted. Thus, 
our Middle Western states of the upper Mississippi Valley pro- 
duce hay, grain, and livestock, not only to supply bread, meat, 
and dairy products for themselves, but for the rest of the country 
as well, besides sending a great deal abroad. The South grows 
cotton enough to supply the greater part of the world. Both 
regions receive in exchange for these farm products the manu- 
factured products of the Eastern states and foreign countries, 
and the mineral products of the mountain states and the upper 
regions of the Great Lakes. 

It is the territorial division of labor which gives rise to the 
important business of transporting goods from one region to 
another. Obviously, if one region should find it advantageous 
to produce everything needed or desired by its inhabitants, there 
would be no occasion for transporting goods into it. Similarly, 
if it did not produce a surplus of something or other which 
could be sold on an outside market, there would be no occasion 
for transporting goods outward. At the same time, the terri- 
torial division of labor is made possible by the transportation 
of goods, and tends to grow in importance in proportion as 
transportation becomes cheaper and more efficient. A slight 
advantage in the exchange of products might easily be over- 
come by a heavy transportation cost. For example, even though 
New England cannot grow wheat so economically as Kansas or 
North Dakota, yet, if the cost of transporting wheat over the 
intervening distance, and of transporting manufactured products 
back to pay for the wheat, were very high. New England might 
find it advantageous to grow her own wheat, and the states 
which now produce wheat might find it advantageous to do 
their own manufacturing. 



128 PRINCIPLES OF POLITICAL ECONOMY 

The advantages of a territorial division of labor, where the 
transportation problem is solved, are similar to those which 
result from a division of labor among individuals in the same 
neighborhood. If it is profitable for each individual to spe- 
cialize upon the work for which he is best fitted, it is equally 
profitable for each neighborhood to specialize. In almost any 
neighborhood, however, there is some diversity of soil and 
natural resources, as well as a diversity of talents among the 
people. Therefore it will seldom happen that a whole neigh- 
borhood, much less a whole region of considerable size, can 
profitably specialize upon a single product. It is rhore likely 
to happen that a whole neighborhood or region will find it 
advantageous to specialize upon a number of products. Thus, 
New England, the South, and the corn belt each produces 
a considerable variety of products, but each also finds it advan- 
tageous to import a considerable variety of other products. 
New England, for example, probably secures her bread and 
meat at less cost to herself by devoting most of her energy to 
manufacturing and then exchanging her manufactured prod- 
ucts for the wheat and beef of the West than she would if 
she tried to grow these important food products on her own soil. 
Let us suppose that the labor of an average man will produce 
in a year eight hundred dollars' worth of goods in an average 
New England factory, but only six hundred dollars' worth of 
wheat on an average New England farm. Let us assume that 
it costs twenty-five dollars to ship his goods west, and seventy- 
five dollars to ship the wheat east. Let us assume, further, 
that in the wheat-growing sections of the West the labor of 
an average man will produce a thousand dollars' worth of wheat, 
and only eight hundred dollars worth of goods in a factory. It 
can easily be figured, so long as the conditions remain as we 
have assumed them to be, that the wheat section can get more 
satisfactory products for its labor by growing wheat than by 
manufacturing, and that New England can get more wheat 
for her labor by manufacturing than by growing wheat. 



THE DIVISION OF LABOR 1 29 

International division of labor. When the territories con- 
sidered are not different sections of the same country but dif- 
erent countries, we have what is known as the international 
division of labor. Were it not for certain uneconomic factors 
which enter into the problems of national life and existence, 
everything which can be said in favor of a territorial division 
of labor and freedom of exchange within a country could also 
be said, and with equal force, in favor of an international 
division of labor. The chief of these uneconomic factors is 
the possibility of war. War is the greatest disturber of normal 
economic activities, and until it can be eliminated, every nation 
must calculate upon its possibility and be prepared for it. In 
case of war a nation which is not prepared to produce all 
the necessaries of life, as well as all military supplies, may find 
itself helpless before a foreign enemy. Its only other hope 
would be to keep open the channels of commerce which con- 
nect it with outside sources of supply, but this is one of the 
things which the enemy country would try to prevent. 

In some animal societies, and especially in the colonies of 
certain insects such as bees and ants, there is an elaborate and 
admirable division of labor. Elaborate and admirable as it is, 
however, it is rudimentary as compared with that which is 
found in any highly developed industrial society. There is no 
such minute division of labor and extreme specialization as is 
found in a modern factory ; there is no such detailed planning 
for the distant future, there is no such bringing together of 
materials from distant places, there is no such coordination of 
labor performed at such widely separated times and places, there 
is no such system of exchange as we see carried on all about 
us in our own communities. If you will study the various 
material objects on your dinner table and find out all about 
each of them, you will find that literally thousands of people, 
few of whom you ever saw or heard of, or who ever saw or 
heard of one another, have had a part in the preparation of 
your meal and the table, dishes, knives, forks, and spoons 



130 PRINCIPLES OF POLITICAL ECONOMY 

which you use. It is through the system which we have called 
the division of labor that you, by doing a very few useful things 
and doing them well, find a considerable variety of objects on 
your table at the proper time without your having given much 
thought to any one of them. 

No preconceived plan. This is sometimes called the organ- 
ization of industry. The term organization may be a little 
misleading, though not necessarily so. It seems to imply that 
somebody thought it all out or planned it and then organized 
the system. It did not come about in that way. The process 
was more nearly like the slow growth of an organism. Each 
individual has looked about for something to do in order to 
earn a living, and has taken what looked to him at the time 
as the most available opportunity. Wherever there was a 
scarcity of workers, there has been an opportunity for a new 
worker. Wherever there was an oversupply, the opportunity 
has not looked so good. By that simple process in which each 
individual chose to do that which he could do best, the whole 
elaborate system has been worked out. 

Adam Smith's remarks, quoted earlier in this chapter, re- 
garding the way in which the minute division of labor has 
aided in the invention and improvement of machinery, may 
be applied to the much greater problem of the development 
and improvement of a great and complex industrial system. 
When each workman spends all his time performing a single 
operation, it is much easier for him to devise a better way of 
doing it than it would be if he had to give his attention to 
many things. It is probable that no important and complicated 
machine was ever invented and made to work successfully 
without a great deal of trying out, modification, and general 
improvement. In actual use many weaknesses in the machine 
are revealed, which no inventor, however wise, could have fore- 
seen and prevented. What is sometimes called the heroic 
theory of invention does not actually work in practice. By the 
heroic theory is meant the theory that a great invention springs, 



THE DIVISION OF LABOR 131 

a completed whole, from the mind of the inventor, as Athena 
sprang full-armed from the head of Zeus. The fact seems to 
be that no human mind is capable of inventing a complete 
and successful machine without many trials, failures, modifica- 
tions, and detailed and piecemeal improvements. Even such 
a simple device as a bicycle passed through a long and inter- 
esting evolution before it reached a stage which made it gen- 
ally useful and popular. The automobile is another illustration 
of gradual and detailed improvement after it was actually in use. 
If it is impossible for any human intelligence to invent and 
construct at once a satisfactory automobile, it would be obvi- 
ously impossible to have invented and organized a whole indus- 
trial system. It would present an infinitely more difficult prob- 
lem than the invention and construction of any machine that 
was ever built. It has been by age-long trial and error, varia- 
tion and selection, experiment and failure, that even a tol- 
erably successful industrial system has been worked out. There 
are doubtless endless improvements yet to be made, but they 
will certainly be made by the same process of gradual and 
piecemeal adjustment. Anyone who thinks that he can devise 
and organize a better system than the present shows, by the 
very fact that he thinks so, that he is unfitted for the task. 
He shows that he lacks the first element in fitness ; namely, a 
knowledge of the vastness of the problem and the infinite 
number of difficulties to be overcome. It is different, however, 
with one who thinks of some detail in the present industrial 
system which might be improved. This presents a problem 
worthy of the greatest minds, and it also furnishes a possibility 
of genuine achievement. 



CHAPTER XI 

POWER 

Power needed for moving material objects. It has been 
pointed out in Chapter VIII that man's work, on the physical 
side at least, consists in moving material objects. For this work 
the first essential is power. The power first applied was, of 
course, that which was generated in his own body and exer- 
cised through his own muscles. But the secret of the indus- 
trial success of modern civilized nations lies in their command 
of other sources of power rather than in any superior muscu- 
larity of their own. 

Animal power. The first of these other sources of power 
which man utilized on a large scale was that of animals which 
he domesticated and enslaved. They are still one of the most 
important sources, if not the most important source, of power. 
According to the Yearbook of the United States Department 
of Agriculture there were on the farms of the United States 
on January i, 191 6, about 25,731,000 horses and mules, to say 
nothing of those in use in the cities and towns. The latest figures 
for horses and mules not on farms are those given in the cen- 
sus of 1910. On April 15 of that year there were 3,543,000. 
Assuming that there were as many in 19 16, it would bring the 
total up to 29, 1 84,000. Some of those on farms, of course, are 
colts too young to work. Those of working age, both on farms 
and not on farms, are probably close to 25,000,000. Besides 
horses and mules, a few oxen are still used. The '' primary 
horse power ' ' (that is, horse power in its original sense) used 
in manufacturing in the United States in 19 14 was estimated 
at 22,547,574. It has been increasing rapidly, so that by 1916 
it was certainly much larger. It is not easy to compare the 

132 



POWER 133 

actual working power of a horse with that of the horse-power 
unit as used in measuring the power of a steam engine, but, 
assuming that they are equal, it would appear that the total 
animal power in use in the United States is very nearly as great 
as the total steam and water power used in manufacturing. 

Among the animals which have furnished power for man's 
work may be named the horse, the mule, the ass, the ox, the 
buffalo, the camel, the elephant, the reindeer, the llama, the 
dog, and the goat. Of these, the most important for the north 
temperate zone is the horse, though the ox is a close second. 
Originally, in fact until very modern times, the horse was used 
mainly to carry man himself or loads of material on his back 
rather than for traction ; that is, for pulling or drawing loads. 
Such traction as he was required to perform was the drawing 
of war chariots and carriages of state, and, later, carriages and 
vehicles for the conveyance of travelers. His speed fitted him 
especially for this work. For the slower and heavier work of 
plowing, harrowing, and drawing heavy loads of farm produce 
the ox was long considered superior. In the first place, he was 
larger and heavier than the horses of that day. His heavy 
body and short legs and his general anatomy seemed to fit him 
peculiarly for pulling. He fights by pushing with his head. 
This seemed to call into play the same muscles, bones, and 
joints as are used in pushing on the yoke. During the last 
century or so the horse and the mule have been gradually 
displacing the ox even in agriculture. 

Displacement of the ox by the horse. Two factors have con- 
tributed to this change from the ox to the horse and the mule 
as a source of power for farm work. One is the development 
of large and heavy breeds of horses of such strength and 
docility as to fit them as well as oxen for the pulling of heavy 
loads. The other is the development of farm machinery. All 
large breeds of horses, however, have been developed in the 
northwestern parts of Europe ; that is, in Great Britain, northern 
France, Belgium, Holland, and Denmark. Whether this is due 



134 PRINCIPLES OF POLITICAL ECONOMY 

to something in the soil or cHmate, or simply to the ability of 
the people of those countries as animal breeders, it is impos- 
sible to say. Russia and Hungary are also horse-breeding coun- 
tries and use horses to a certain extent for traction purposes, 
but they have not produced such huge draft horses as the 
other countries mentioned. The United States is also breed- 
ing large numbers of heavy draft horses, but we have imported 
our breeding stock from Great Britain, France, and Belgium. 
We surpass all other countries, however, in the number, quality, 
and speed of our trotting horses. The lighter breeds of horses 
not only lack the weight necessary for drawing heavy loads but 
they are also likely to be too nervous and excitable. The 
United States and Canada, together with the countries which 
originated the heavy breeds, have pretty generally substituted 
the horse and the mule for the ox even in farm work. 

The mule. Southern Europe and the southern part of the 
United States have made large use of the mule. This hybrid, 
combining something of the patience and endurance of the 
ass with the size and strength of the horse, is admirably 
adapted to farm work in climates where the huge draft 
horses of the north suffer from the heat, and where the lighter 
horses of the south are too nervous and excitable for the slow, 
heavy work on the farm. Even the ass has played a humble 
though useful role by furnishing power to those who could not 
afford a more expensive animal, such as a horse or a mule. 

Both the horse and the mule, even the huge draft breeds, 
have one great advantage over the ox ; that is, their more rapid 
gait. While they cannot trot as well as the lighter breeds of 
horses, they can trot very much better than the ox and they 
can walk much faster, and in farm work it is this faster walk 
which counts. 

The factor which has had a great deal to do with the 
substitution of the horse and the mule for the ox is the in- 
creased use of agricultural machinery. This has required power 
of a superior kind, and the horse has proved to be much better 



POWER 135 

adapted than the ox to the drawing and handling of machinery. 
This is mainly because of his more rapid gait. When the 
farmer has his money invested in expensive machinery, it is 
important that he get as much work out of it as possible. He 
can scarcely afford to allow it to run so slowly as would be 
necessary if it were drawn by oxen. 

Farm machinery. Still another factor which has contributed 
to this end is the higher wages for farm labor in the countries 
of northwestern Europe, Canada, and the United States. If 
a farmer were hiring labor at a very low wage, it would not 
be so important that he get the most possible work out of his 
hired man. But when labor is expensive, it works very much 
as it does when tools and machinery are expensive. It is thus 
important that as much as possible shall be accomplished by 
each laborer. It is therefore better to give him a fast-walking 
team than a slow-walking team. 

Historical importance of the ox. The ox, however, from the 
most ancient times until quite recently, has been the chief 
if not the sole draft animal of all the races that have used 
draft animals at all. His docility and patience, his great 
strength, the cheapness of his harness, and his ability to find 
his own living when not at work, contributed to make him a 
most valuable assistant to man in his struggle for the conquest 
of the earth. In the pulling of the heavy wooden plows and 
harrows that were in use before the modern steel tools were 
invented, and the lumbering carts that were in use before 
modern vehicles were constructed, he enabled men to cultivate 
the soil on a vastly more extensive scale than would have been 
possible by human muscles alone. He thus contributed to the 
production of food for increasing populations of men, and in 
the end he contributed his own body to help feed them, and 
his own hide in order that they might be shod. In many 
parts of the world he is still the principal draft animal for 
farm work. In southern Europe, southern Asia, and parts of 
South America one may still see magnificent teams of oxen 



136 PRINCIPLES OF POLITICAL ECONOMY 

at work in the fields and drawing carts along the highways. 
They move with a steadiness and massiveness which give the 
impression of irresistible power, but they are too slow for 
most of our hustling Americans, though a good many oxen 
are used in the rough lands of New England. If we take the 
whole history of man's use of power, it is probable that the ox 
has furnished more in the aggregate than any other agency, 
not excluding coal and steam. 

Tropical animals. The Asiatic elephant and the camel are 
admirably fitted for tropical and subtropical countries, the 
former in moist and the latter in dry climates. The African 
elephant has never been domesticated, either because of his 
fierce and intractable disposition or because the natives of 
Africa did not care to domesticate him. It is a remarkable 
fact that the native African races never domesticate any animal, 
not even the zebra, which appears to be capable of domestica- 
tion. However, no other race has reduced any animal to 
domestication since prehistoric times. Prehistoric man was 
either our superior in this art or else we have not sufficiently 
felt the need of any more animals. The prodigious strength 
and the remarkable intelligence of the elephant fit him for a 
variety of operations besides pulling loads. He requires con- 
siderable quantities of coarse fodder such as grows abundantly 
in warm and moist countries. The great advantage of the 
camel in dry countries is, of course, his well-known ability to 
work for long, periods without water. He is used in parts of 
southwestern Asia and northern Africa, The water buffalo 
posseses qualities almost the opposite of those of the camel ; 
that is to say, he can work only where water is abundant and 
easily accessible, not only for drinking but for frequent bath- 
ing or wetting of the skin. He is a powerful animal and well 
adapted to working in muddy lands and irrigated rice fields. 

In polar regions, where vegetation is scarce, the problem of 
animal power is a more difficult one. Where moss and lichens 
abound, the reindeer is a valuable source of power. In the 



POWER 137 

high mountain regions of Peru the llama is used for carrying 
loads but not for traction. Where forage is not found in 
sufficient abundance, but where meat and fish can be provided, 
some carnivorous animal has to be used. The dog is the only 
one which is sufficiently well domesticated to serve the purpose. 

Solar energy. The great physical source of power, so far as 
man has been able to develop it, is understood to be the sun. 
The amount of solar energy which comes to the earth in the 
form of light and heat is so stupendous as to bewilder the 
imagination. Its most important service is in the promotion 
of plant growth, and, through plants, of animal growth ; but it 
is also transformed into mechanical power in a number of ways. 

In the first place, it vaporizes water. Since the air is 
heavier than water vapor, the latter rises, or, more literally, the 
air falls through gravitation. When this water vapor reaches 
high altitudes and is congealed, it becomes heavier than air 
and falls through gravitation in the form of rain, snow, etc. 
Some small fraction of it falls on mountains and other high 
portions of the earth's surface. Gravitation still pulls it down- 
ward through the streams. These are harnessed and made to 
turn water wheels, thus furnishing mechanical power to do 
man's work ; that is, to move pieces- of matter. 

In the second place, through plant growth combustible 
material is stored up in the bodies of trees and other 
plants. When this material is burned, heat is developed which 
may be used to vaporize water. In the form of vapor the 
water expands and may be made to push a piston, which is, 
again, a usable form of mechanical power for the moving 
of other bodies. The accumulation and covering over of vast 
masses of combustible vegetable material in previous geological 
periods gave us our coal beds, which have recently become a 
principal source of both artificial heat and mechanical power. 
It is generally supposed that petroleum is of animal origin. 
If so, it is, like coal, the product of solar energy and may be 
used, like coal, to transform water into steam. The internal 



138 PRINCIPLES OF POLITICAL ECONOMY 

combustion engine is a later development and is, in many 
ways, a superior method of transforming combustion into 
mechanical power. 

In the third place, the direct rays of the sun may be so con- 
centrated as to produce an .intense heat, which may, in turn, 
be used to transform water into steam. According to tradition, 
the great mathematician, Archimedes, burned the Roman ships, 
which were besieging his native city of Syracuse, by the use 
of a large number of mirrors. By reflecting the sun's rays 
from all these mirrors upon a single spot, so much heat was 
concentrated as to set the ships on fire, one after another. 
Whether there is any foundation of fact for this story or not, 
there is no doubt as to the possibility of producing an intense 
heat by the concentration of the rays of the sun. Anyone 
can demonstrate this with a common burning glass. Solar 
engines have already been constructed which make use of con- 
verging mirrors for the concentration of the sun's rays. This 
produces an intense heat, which, in turn converts water into 
steam and moves a piston. 

Winds. In the next place, if we may assume that winds are 
in general caused by variations in temperature, they may be 
said to be derived from solar energy. This mechanical power, 
as used for the moving of boats, has been of the very greatest 
importance in the development of commerce and the spread of 
civilization. The epoch-making voyages of Columbus, as well as 
the voyages of great numbers of men less noteworthy than he, 
were made possible by the ingenuity with which man had learned 
to utilize this vast source of power. For certain kinds of station- 
ary work which does not have to be performed regularly, such 
as pumping water, grinding grain, etc., the windmill has proved 
an economical device for utilizing the power of the winds. 

Tides. Another source of power of which some use has 
been made is the tide. This can be traced to the momentum 
of the earth rather than to solar energy. The rising and the 
falling of the tides, especially along coasts with many inlets 



POWER 1 39 

and estuaries, have created opportunities for tide mills which 
can be made to do certain kinds of work. 

With all these sources of power, and possibly others which 
may be developed, there is no likelihood that our ingenious 
race will ever be compelled to fall back upon its own muscles, 
or even to depend exclusively upon animal power. In that dis- 
tant day when our coal beds and oil fields are exhausted, the 
sun's rays will still continue to strike the earth. That being 
the case, trees and other plants will still grow, though wood 
could scarcely take the place of coal and petroleum. Alcohol 
can scarcely become as cheap as gasoline has been in the past, 
but it can be manufactured in considerable quantities from a 
variety of plants. Again, the rains and the snows will continue 
to feed our rivers and turn our water wheels. Electrical trans- 
mission will enable us to utilize many streams now running idly 
to the sea, and to distribute the power over wide areas and send 
it long distances from the streams. Solar engines may be so 
perfected as to enable us to utilize the inconceivable and inex- 
haustible flow of energy which comes to us in the form of direct 
rays from the sun. The winds will continue to blow and push 
our sails and turn our windmills. And so long as the earth con- 
tinues to revolve about its axis, the tides will continue to ebb and 
flow, and these may furnish us considerable quantities of power. 

Even if it should happen that none of these sources, nor all 
of them combined, should furnish power quite so cheap as that 
which we now enjoy through the use of coal, still we may be- 
come so well-to-do, through improved agriculture, improved 
technical processes for utilizing power, and more rational habits 
of living, as to enable us to bear the extra cost of these other 
kinds of power with no great inconvenience. Even if this 
should not happen, it must not be forgotten that a considerable 
number of civilizations have been built up and multitudes of 
people have lived comfortably and happily with no power ex- 
cept that of their own muscles, their domestic animals, the 
winds, and the waterfalls. 



140 PRINCIPLES OF POLITICAL ECONOMY 

The steam engine. Next to the yoking of the ox at some time 
in the prehistoric past, the most momentous event in the his- 
tory of man's power was the invention of the steam engine. 
The reason why this was so momentous was that the coal beds 
of the north temperate zone furnish a vast quantity of very 
cheap and very concentrated fuel. It is difficult to see how the 
heat of burning coal could have been transformed into mechani- 
cal power in any other economical way. The great cheapness 
and economy of this source of power is what has made it such 
a powerful factor in the development of modern industry. By 
merely vaporizing water in a boiler by means of this cheap fuel, 
enormous pressure can be exerted. This pressure can be made 
to move a piston. From this point on, further developments 
are merely the results of mechanical adjustments. Whenever 
one object, such as a piston, can be made to move as we want 
it to move, other objects can be hitched to it and be made to 
move also. The first of these mechanical adjustments to pro- 
duce great results was when the moving piston was made to 
turn a wheel, thus converting linear motion into circular 
motion. After that adjustment was made, every form of steam- 
driven machinery became a mechanical possibility. 

Time does not permit us to mention all even of the really 
important adjustments which have been made for the greater 
utilization of the pressure of steam on a movable piston. The 
economical conversion of mechanical power into electricity, and 
of electricity back into mechanical power, has enabled us to uti- 
lize power in a variety of ways which were formerly impractical, 
besides giving rise to an electrical industry of vast proportions. 
The internal combustion engine has made possible automobiles 
and flying machines. 

Roads. The subject of roads and tracks would furnish an 
interesting study to supplement a study of power. The better 
the track, of course, the less power it requires to move an object. 
This would include everything from the air and the ocean, 
railway tracks, paved streets, and dirt roads, down to the 



POWER 



141 



lubricated grooves, cylinders, and sockets through which the 
parts of a machine are made to move. Roads, streets, and 
railway tracks will be discussed under the head of transportation. 
The rest must be left to the imagination of the student. 



Human 



Power 



r Muscular < 



Mechanical < 





' Horses 




Mules 




Asses 




Oxen 


Animal ^ 


Buffaloes 
Yaks 




Elephants 




Camels 




Llamas 




, Dogs 


'Wind 


f Streams 


Water 


<! Waves 



y , J Steam engines 

[^ Internal-combustion engines 

Solar engines 



CHAPTER XII 

LAND 

Factors in the Productivity of Land 

^ ^^ • f I . Solidity „ „ • f i • Location 

A. Noneconomic^ ^ ^ B. Economic-^ _ ... 

L2. Extension {,2. Fertility 

Noneconomic properties of land. Some of the physical and 
geometric properties of land which are the most fundamental 
are not the most important from an economic point of view. 
The solidity of the earth which serves to support our weight, 
and that of the buildings which we erect and the plants which 
we grow, is of course essential to our very existence. It is 
not a matter of the greatest economic interest, however, because 
it is not so scarce as some other properties. Rocky or desert 
land, of which there is an abundance, furnishes support as well 
as fertile land. The quality of extension, that is, superficial 
area, is also essential. It is this which enables us to catch and 
utilize the sun's rays, the rain, and the dew. It is this which 
provides room for plants to grow, to spread their roots to the 
soil and their leaves to the air. It is this which furnishes space 
for the erection of buildings and the carrying on of all activi- 
ties. This quality of extension, however, is possessed by sterile 
as well as by fertile land, and by land which is badly located as 
well as by land which is well located. 

Economic properties. Location may also be said to be a 
geometric property of land. It is a matter of great economic 
importance, because there is such a scarcity of land in the best 
locations. By location is meant proximity and convenience of 
access to markets, roads, schools, scenery, and various other 
desirable things. Some land is greatly superior to other land 

142 



LAND 143 

in this respect, and this creates a great difference in the desir- 
ability of different lands. Location is the chief, almost the 
only factor in determining the value of urban land. In a 
place where multitudes of people desire to live, land is neces- 
sarily scarce, but the scarcity is a scarcity of land well located 
for urban purposes ; that is, for business or for the dwellings 
of those who have to live within reach of the business estab- 
lishments. Moreover, the differences in the value of lands 
within a city are due almost wholly to differences in location. 
In agricultural communities location is a factor, but not the 
only nor the most important factor, in determining land values. 
Nearness to market or to railroads, the character of the wagon 
roads, accessibility to schools and other social advantages, count 
for much ; but the character of the soil and the subsoil, the 
climate, the moisture, and the other factors which determine 
plant growth, count far more. All these factors which promote 
plant growth may be grouped under the name fertility. In 
that case we may say that from an economic point of view 
location and fertility are the most important properties of 
agricultural land. 

Good location saves transportation. When we look for the 
reason why location is a matter of such importance, we must 
recall the fact that man's chief work, on the physical side, is 
the moving of materials. It is this which requires power ; and 
power is costly, whether it be generated in the human body 
and exercised through the muscles, or whether it be developed 
in the bodies of animals, or through mechanical agents. One 
very important phase of the work of moving materials is that of 
marketing products. The nearer a body of land is to a market, 
and the better the means of transportation, the less labor and 
power it takes to get its products to market. On land which is 
well located with respect to markets it is therefore possible to 
utilize labor more efficiently than on land which is badly located. 

It is also costly to move man himself. It is therefore advan- 
tageous that he should live in close proximity to his work. 



144 PRINCIPLES OF POLITICAL ECONOMY 

If he lives far away, the cost of transportation is greater, and 
the labor force of the community is less efficiently applied, than 
if he lives close by. Even though the trolley fare is the same 
for a long as for a short distance, transportation costs more 
over the long distance. In the first place, it takes a longer time 
and the passenger loses that time. In the second place, it costs 
the transportation company more, and that extra cost must ulti- 
mately reduce the total productive power of the community. 
The extra labor required to transport passengers a longer dis- 
tance might otherwise be used in other lines of production. 
However, the sheer scarcity of land, both for business and for 
residence purposes, forces population to spread and makes long- 
distance transportation necessary, however costly it may be. 

In proportion as transportation can be cheapened, in that 
proportion will questions of location become of less importance 
from the standpoint of production. From the standpoint of con- 
sumption or direct enjoyment, cheapened transportation would 
apparently make little difference. Certain neighborhoods, be- 
cause of neighbors, scenery, fashion, and a variety of reasons, 
would still be preferred to others. If one could imagine cost- 
less transportation, such as is pictured in the Arabian Nights 
by the story of the magic rug, on which one could be instantly 
transported to any distance, one location would be as desirable 
for production as another ; that is to Say, if there were no dif- 
ference between two pieces of land in fertility or in anything 
else except location, they would be equally desirable. It would 
cost no more to transport products to market, or men to and 
from their work, in one case than in another. So far as loca- 
tion is concerned there would be no scarcity of land until all 
the unoccupied portions of the earth were occupied and utilized. 
In short, such a perfect system of transportation would vastly 
increase our available supply of usable land. 

While it is obvious that no such instantaneous and costless 
system of transportation will ever be devised, it is equally 
obvious that the more nearly we can approach that system the 



LAND 145 

more land we shall have available for all sorts of purposes. It 
is the superiority of modern as compared with earlier means 
of transportation which makes possible those vast aggregations 
of people known as cities. They can draw their supplies from 
greater distances and in greater abundance than would be pos- 
sible with less efficient means of transportation. Ancient cities 
that were situated on navigable rivers or on the seashore had the 
advantage of water transportation, which, even before the days 
of steamships, was fairly cheap and efficient. Nonperishable 
products, such as wheat, could then and can still be transported 
long distances in sailing vessels at low cost. Consequently, 
where water transportation was possible, cities of considerable 
size grew up long before the days of steam railways. But 
inland cities, such as many of those which dot the maps of 
every progressive country, would have been an impossibility. 

Access to food supplies. It seems to be a general rule, apply- 
ing to all forms of life, that numbers depend upon food supply. 
Where food is abundant, numbers may be large. Since food 
comes ultimately from the soil, the capacity of the soil to pro- 
duce food places a limit upon numbers. One of two things 
must, of course, follow : a large population must either spread 
over wide areas of land in order to find sufficient food, or it 
must transport food from these wide areas where it is produced 
to the densely populated centers where the people live. Certain 
birds reverse this process and manage to live a part of the 
time in large flocks and transport themselves to and from their 
feeding grounds. If they are strong fliers, as were the wild 
pigeons which formerly inhabited this continent, they may feed 
over large areas and return to their roosting places at night. 
It was their remarkable powers of flight which enabled such 
vast numbers to roost in the same locality ; otherwise they 
would have been compelled to break up into smaller flocks in 
order to live nearer their feeding grounds. The same law 
seems to apply to human flocks. If we were not able to trans- 
port food and other supplies such long distances, our large 



146 PRINCIPLES OF POLITICAL ECONOMY 

cities would be compelled to scatter and build many smaller 
cities, or else live as scattered families, in order to be nearer 
the sources of supply. Even with our present means of trans- 
portation there are limits beyond which it does not seem to 
be advantageous to concentrate our population. Consequently 
we find many small cities and towns whose people live by the 
indoor industries. They are nearer sources of supplies of various 
kinds, besides having more room for their own industries. 

Increasing floor space by erecting tall buildings. The neces- 
sity for room for the indoor industries can be supplied in part 
by tall buildings. Floor space can be increased by as many 
stories as can be built, subtracting, of course, the space 
necessary for elevators, stairways, airshafts, etc. But after 
a very moderate height is reached, the cost of construction 
increases more than in proportion to the added floor space. 
To add one more story on the top of a tall building requires 
stronger walls all the way down, and also a better foundation. 
Besides, it costs more to carry the building materials to the 
greater height; the cost of elevator service to the top floor 
is somewhat higher than for lower floors. A twenty-story 
building is of a very moderate height in some of our large 
cities, where land is very scarce ; but even this height would 
be absolutely unprofitable in a town where there was plenty of 
room on the ground. 

Streets. The traffic needs of a busy population also make 
demands upon land for streets. Much the same methods are 
used to economize land for street purposes as for building 
purposes. The building of subways, sub-subways, elevated 
roads, and viaducts is a familiar method. It used to be sug- 
gested in a jocular way that a road through the air would 
also economize land. Flying machines may eventually trans- 
form that joke into a real economy. Superior pavements for 
the support of larger and more powerful vehicles will also 
economize road space somewhat, by permitting more traffic to 
be carried on over a street of given width. 



LAND 147 

Economizing agricultural land. These methods of econo- 
mizing land are suited to urban rather than to rural districts. 
Space is required in agriculture, as suggested above, for the 
utilization of solar energy, soil, and moisture in plant growth. 
"Two-story farming," as Professor J. Russell Smith calls it, 
consists in growing tree crops and ground crops underneath 
the trees. Some space can be saved in these ways, where 
there is plenty of sunlight, soil, and moisture, but not a great 
deal. It enables the plants to utilize sunlight a little more 
effectively, perhaps, because the low-growing plants can use 
that which filters through the foliage of the trees ; but if the 
trees use too much (that is, if the low-growing plants are 
shaded too much), their development is retarded. There may 
be some economy of soil fertility also if the trees send their 
roots deeper than the smaller plants. In that case the two 
kinds of growth do not compete directly for soil fertility. 
Where an abundance of artificial fertilizer can be used and 
water for irrigation is plentiful, an adequate supply of plant 
food and moisture can be supplied to both kinds of vegetation. 
In this case the limiting factor is sunlight. This is a factor 
for which we have not yet found a good substitute. Therefore 
we must continue to spread our cultivation over wider areas 
if we are to support larger populations. 

Intensive farming. '' Two-story farming " is only one phase 
of intensive agriculture, which may be defined as the use of 
large quantities of labor and capital in the cultivation of rela- 
tively small areas of land in order to get large crops per unit 
of land ; that is, large crops per acre. As pointed out in 
Chapter XV, extreme efforts to increase the productivity of land 
tend to decrease the productivity of labor ; that is, to reduce 
the product per unit of labor. When a country becomes thickly 
populated, however, if its people are unwilling to migrate to 
countries where land is abundant, the problem of economizing 
land becomes one of great importance. So long as it can 
find markets for the products of indoor industries, it may 



148 PRINCIPLES OF POLITICAL ECONOMY 

bring the products of the soil from less densely populated 
countries. When these outside markets cease to expand, and 
it is therefore compelled to live more and more from the 
products of its own soil, it must perforce get more and more 
out of its soil. Intensive agriculture is then forced upon it. 
Yet, as a matter of observed fact, intensive agriculture the 
world over is associated with the poverty of those who actually 
work on the soil, though it may be also associated with the 
riches of those who own the soil. 

Intensive farming and poverty. This impoverishment of the 
worker on the soil where the soil is intensively cultivated is 
not absolutely necessary except where the intensive cultivation 
is carried to extremes. It is a necessary result, however, if 
the attempt is made to force a larger crop from the soil by the 
mere application of more and more labor to each acre of land. 
The yield is found not to increase in proportion as the labor 
is increased, which necessarily means a smaller product per 
man. But if more capital is used, as well as more labor, 
particularly if better methods of cultivation are adopted and 
carried out by means of the larger use of capital, increasing 
yields per acre may be secured for a time, and up to a certain 
point, without any diminution of yield per unit of labor. By 
using more power and larger tools in order to plow deeper 
and prepare a better seed bed, a given amount of labor may 
cultivate the same acreage of land as before and yet get a 
larger yield per acre. This would also give a larger yield per 
man. Again, by cultivating a slightly smaller acreage and 
cultivating it more thoroughly by means of better tools, the 
same product per man may be secured and a somewhat larger 
population may be supported without any diminution in aver- 
age income. But experience shows that wherever even this 
process is carried too far, a smaller product per man, and 
consequent poverty, will be the result. 

A seeming exception to this rule (but it is only a seeming ex- 
ception) is found when a few cultivators turn from the growing 



LAND 



149 



of staple crops to the growing of high-priced specialties. Only 
a few can do this, for the reason that the market is very limited. 
The mass of the farming population must grow the crops 
which feed and clothe the people. Those who do succeed 
in this field may manage to make good incomes from very 
small plots of land. This does not prove by any means that 
the growers of wheat or beef could do likewise. So long as 
consumers demand wheat bread and beef as parts of a steady 
diet, they must draw their subsistence from considerable areas, 
for these products can be most economically produced by what 
are commonly known as extensive methods of cultivation. 

Turning to heavy-yielding crops. If people would change 
their habits of consumption, and consume products which could 
be economically produced under intensive methods, or products 
which are capable of yielding large quantities of food per acre, 
a great deal of land could be saved ; in other words, a much 
larger population could be supported from a given area. 

The following table shows the estimated power of an acre 
of land under good cultivation, but not the most intensive 
cultivation, to produce food of different kinds : 





Food Value 
PER Pound 
IN Calories ^ 


Pounds 

per Acre 

(Good Yield) 


Calories 
per Acre 


Ratio to 

Wheat as 

Basis 
(Per Cent) 


Entire wheat flour . . . 
Native beef (as purchased) 
Mutton (as purchased) . . 

Whole milk 

Corn meal (unbolted) . . 

Oatmeal , 

Rice 

Rye meal as flour .... 

Beans 

Potatoes 

Sweet potatoes 


1660 
II30 
1275 
325 
1550 
i860 
1630 
1630 

^590 
325 
480 


1,800 

200 

250 

4,000 

3,600 

1,800 

2,400 

1,800 

2,400 

24,000 

30,000 


2,988,000 

226,000 

318,750 

1,300,000 

5,580,000 

3,348,000 

3,912,000 

2,934,000 

3,816,000 

7,800,000 

14,400,000 


100 

7 
II 

43 
186 
112 

131 

98 

129 

260 
482 



1 From Btdletin 28, United States Department of Agriculture, Office of 
Experiment Stations. Government Printing Office, 1896. 



ISO PRINCIPLES OF POLITICAL ECONOMY 

Of course, there are elements of food value other than the 
heat-producing elements, but this table is enough to indicate 
that some economy of land could be effected by consuming 
other and more heavy-yielding crops than wheat and beef. 
Even these economies of land, however, might be gained by 
a less economical use of labor. While wheat and beef require 
considerable areas of land for their most economical production, 
they can be produced with comparatively small quantities of 
labor where the conditions are right. On our western wheat 
farms, for example, where powerful machinery can be used, a 
small number of men can grow and harvest a very large 
acreage of wheat. On our western cattle ranges also a small 
number of men can care for large numbers of cattle pasturing 
over very wide areas. If we did not have land enough for these 
purposes, and had to support a growing population from our 
own soil, potatoes, sweet potatoes, corn, beans, and milk, and 
milk products in the form of butter and cheese, would support 
many more people than could be supported on wheat and beef. 

The banana and the date. Certain tropical countries have 
great advantages in the way of food production on small areas. 
Concerning the banana, Humboldt wrote : ''I doubt if there 
exists another plant on the globe, which, on a small space of 
ground, can produce so considerable a mass of nourishment. . . . 
The product of bananas is to that of wheat as 133:1, to that 
of potatoes as 44:1." In Arabia and northern Africa the 
date is very prolific and in favorable locations produces large 
quantities of food.^ 

Turning to the indoor industries. It is not likely to be 
repeated too often that the favorite method of economizing 
land and supporting a large population is to give up trying to 
be physically self-supporting and try to become commercially 
self-supporting. By being physically self-supporting is meant 
producing from our own soil all or practically all that we need. 

1 Cf. Buckle, History of Civilization in England, Chapter XI. London, 
1857-1861. 



LAND 151 

By becoming commercially self-supporting is meant bringing 
in the products of the soil from other countries, selling to 
those countries in return the products of the mines and the 
indoor industries. The products of the indoor industries may 
themselves be made from imported raw materials. In this 
case we bring in raw materials, work them up into finished 
products, and sell them again to outside people, living our- 
selves upon the profits of the transaction. We virtually sell 
our labor to other nations. 

This method of building up a great population has such 
vast possibilities, provided we are so situated as to be able to 
do it, as to appeal powerfully to the imaginations of statesmen 
and nation builders. If outside markets fail, then we must 
turn to the development of our own soil, for in that case we 
must become physically self-supporting. 

The pent-up versus the expanding type of civilization. Even 
though we aim to become physically self-supporting, we have 
two distinct lines of development open to us : one is to develop 
an oriental, or pent-up, type of civilization ; the other is to 
develop an occidental, or expanding, type of civilization. By an 
oriental, or pent-up, type of civilization is meant a civilization 
in which we try to live on our existing area of land, and to 
support a growing population, without adding to our productive 
area. This leads to a gradually increasing intensity of cultiva- 
tion and a gradual lowering of the standard of living of those 
who work on the soil, and eventually of the masses of the 
people. By an occidental, or expanding, type of civilization is 
meant a civilization in which the effort is made to maintain the 
standard of living and the product per man in a growing popu- 
lation by widening our cultivated area rather than by cultivating 
the original area more and more intensively. If we had been 
developing a pent-up • civilization, we should never have spread, 
say, outside of the original thirteen states, but should have tried 
to support our increasing numbers by cultivating the soil more 
and more intensively. Indeed, we should probably not have left 



152 PRINCIPLES OF POLITICAL ECONOMY 

Europe in the first place, unless it were to escape persecution. 
We have preferred to expand over more land rather than to try 
to live on the original area, whatever that original area may have 
been. It is difficult to see where this tendency will lead us, but 
it is a rather striking fact that, from the Greeks down to the 
nations of the present, every great European nation has been 
a colonizing nation. Thus people have preferred to go where 
land was abundant rather than to stay where population was 
dense. Unless we change our habit very decidedly, we shall 
probably continue to do the same in the future ; that is, we 
shall try to maintain our standard of living. When this cannot 
be achieved by intensive cultivation, we shall swarm, or send 
out colonists ; that is, some people will emigrate. The only 
alternative would be the maintenance of a stationary population 
through birth control. 

The table on the following page shows, roughly, the area of 
land which it takes to produce, under fairly good agriculture, 
the food of a soldier for a year. 

This does not take into consideration the land necessary to 
clothe him or to feed the horses which are used to cultivate 
the land. If we assume that an average family of five persons 
will consume as much as three soldiers, we shall conclude that it 
takes nine acres to produce the food for a family. Under ordi- 
nary conditions it takes approximately five acres to produce the 
feed for a horse. According to the United States Census, in the 
great farming area of the upper Mississippi Valley there is one 
farm horse for every thirteen acres under cultivation. If, to be 
fairly liberal, one horse is sufficient to cultivate on the average 
fourteen acres, we might conclude that one horse could furnish 
the power necessary to cultivate enough land to grow the food 
for one family (nine acres) and for himself besides (five acres). 

The yields assumed in the above table are not unusually 
large, being about the same as those in England and other 
well-cultivated countries, but they are about twice the average 
yields in this and other new countries. 



LAND 



153 



STANDARD RATION FOR UNITED STATES ARMY 



Articles Consumed' 



Beef, fresh 

Flour 

Baking powder 

Beans 

Potatoes 

Prunes 

Coffee, roasted and ground 

Sugar 

Milk, evaporated, unsweetened 

Vinegar 

Salt 

Pepper, black 

Cinnamon 

Lard 

Butter 

Sirup 

Flavoring extract, lemon . . 



Ounces 1 

ETC. 

PER Day 



20. 
18. 

.08 
2.4 
20. 
1.28 
1. 12 

3-2 
•5 

.16 gill 
.64 oz. 

.04 
.014 

.64 

•5 

.32 gill 

.014 



Pounds per 
Year 



456-25 
410.6 

55- 

456.25 

29.2 

25-55 
7Z- 
"•5 
14.6 



14.6 

"•5 

29.2 



Good Yield 
IN Pounds 
PER Acre 



200 
1,200 



2,400 
[ 2,000 
3,000 
4,800 
2,500 
625 
3,000 



300 

75 
,500 

Total 



Acres required 

to produce 
Yearly Ration 



2.28 
•34 

.022 
.038 
.009 
.005 
.029 
.018 
.004 



.048 



•153 
.01 



2.956 

(Roughly, 
3 acres) 



One very important part of the problem of economizing land 
is that of preserving and improving its present fertility. This 
is to be done mainly by careful management of the soil. Crop 
rotation, a proper balance between plant growing and animal 
husbandry in order to supply natural manure, and an increased 
use of chemical fertilizers are the main parts of a policy of soil 
conservation. How important an item natural manure is in our 
national economy may be shown by the following facts : It has 
been conservatively estimated ^ that the value of the animal 
manure of the country exceeds two billion dollars (^2,225,7005. o«?o^ 
This is greater than the combined value of all the mineral 
output and the entire timber cut of the country at the time the 

1 Cf. " United States Army Regulations, 1913" (corrected to April 15, 1917), 
paragraph 1205, p. 240. Government Printing Office, Washington, 1917. 

2 Farmers^ Bulletin ig2, p. 5, United States Department of Agriculture. 



154 PRINCIPLES OF POLITICAL ECONOMY 

estimate was made. If one third of this is wasted, it amounts 
to a sum much greater than the value of the entire timber cut 
of the country. Clearly the conservation of our animal manure 
is one of our greatest conservation problems.^ The increasing 
use of chemical fertilizers, however, is necessary if we are to 
make increasing drafts upon the soil in order to feed our 
increasing population. 

1 " The Organization of a Rural Community," Yearbook of the United States 
Department of Agriculture, 19 14. 



CHAPTER XIII 

CAPITAL 

What is capital? Capital has come to play a very important 
part in modern industry. This increase in importance has been 
so great as to lead to the impression that capital has come into 
existence only in recent times. That which is essentially capital 
has been in existence as long as tools have been in existence, 
but it has taken on a new and very distinct importance since 
the rise of machine production. 

As a factor in the modern economic system, capital may be 
defined as wealth, other than land, which is used by its owner 
to secure an income rather than for direct enjoyment. Land 
and other natural agents are usually treated as though they 
were in a class by themselves, and are carefully distinguished 
from the products of human industry and enterprise. These 
products of man's effort are subdivided, according to the uses 
to which they are put, into producers' goods and consumers' 
goods. Producers' goods include all tools, machines, buildings, 
appliances, and other forms of equipment which are used for 
the production of other goods ; while consumers' goods, on the 
other hand, include only such goods as are used for direct en- 
joyment rather than for the purpose of producing other goods. 
Capital includes all producers' goods and some consumers' 
goods. It includes all producers' goods, because they are used 
for the purpose of increasing the owner's income. It also in- 
cludes some consumers' goods, because some of these are used 
by their owners for the purpose of securing an income. A 
pleasure automobile, for example, which is let for hire is a con- 
sumers' good from the standpoint of society ; that is, it is not 
used to produce other goods, but is used for direct enjoyment 

155 



156 PRINCIPLES OF POLITICAL ECONOMY 

and satisfaction. From the standpoint of its owner, however, 
it is used to get an income. He gets no consumer's satisfaction 
out of it, but he gets paid for its use, and this payment is a 
part of his income. In short, he keeps it for the sake of the 
income which it brings him. A dwelhng house is hkewise a 
consumers' good from the standpoint of society ; but if it is 
rented, it is capital to its owner. He gets no direct satisfaction 
out of it. He gets money for its use. This money is a part 
of his income. 

Social capital and private capital. Some writers have accord- 
ingly spoken of two kinds of capital : first, social, or productive, 
capital ; and, second, private, or acquisitive, capital. Social, or 
productive, capital is identical with producers' goods ; private, 
or acquisitive, capital includes such consumers' goods as are let, 
rented, or hired by their owners to other people. Consumers' 
goods, of course, are just as useful as producers' goods, but 
they are used for different purposes. Therefore private, or ac- 
quisitive, capital is just as useful as social, or productive, capital. 
The owner is just as well entitled to his income in one case as 
in the other. Capital, then, is goods ; but it is that portion of 
the produced goods in the possession of society which is used 
by its owners for ^thgipurpose of securing income rather than 
for the purpose of direct enjoyment. It is used by its possessors, 
however, as distinct from its owners, either for the production 
of other goods or for direct enjoyment. The possessor of a 
rented shop is using the shop for productive purposes ; the 
possessor of a rented dwelling house is using it for purposes of 
direct enjoyment. 

Capital a class of goods, not a fund of value. Capital is 
sometimes conceived of not as a class of goods but as a fund 
of value. There are two reasons which lead naturally to this 
way of thinking, but there is danger that this way of thinking 
may lead us into serious error. In the first place, however 
capital may have originated historically, one nowadays usually 
comes into possession of it first in the form of money ; that is, 



CAPITAL 157 

the owner of the automobile, the dwelling house, the shop, the 
factory, usually spent money in order to get it. The possession 
of money gives one the opportunity to come into possession of 
these other forms of capital. The purchase of these various 
forms of capital is usually called investing capital. After one 
has purchased a shop or a factory, a house which one intends 
to rent to someone else, or any other income-bearing property, 
one is said to have invested his capital. That sounds as though 
the money were the capital which one had invested. That is 
not strictly true. One has merely exchanged one form of capital 
for another. 

Money one form, but only one form, of social capital. The 
last statement implies that money is a form of capital. This 
has sometimes been disputed. To be sure, money is not the 
only form of capital, but it is one form. While it is not correct 
to say that capital is money, it is correct to say that money is 
capital. A work horse is likewise a form of capital, but it is 
not proper to say that capital is a work horse. There is this 
difference, however, between money and work horses. Very 
few capitalists ever find that the greater part of their capital is 
in the form of work horses. Almost every capitalist nowadays 
finds, at one time or another, that a large part of his capital is 
in the form of money or has passed through that form. He 
is continually buying and selling, receiving money and paying 
out money, and is not receiving work horses and paying out 
work horses. 

Money may be said to be a tool or a means by which the 
community can do more work than it would be able to do with- 
out money. It is therefore, like other tools, a form of capital. 
It is also a very important form of capital, one which is con- 
tinually coming into the possession of every capitalist and be- 
ing paid out again. This leads naturally, as suggested above, 
to the inference that capital consists of a fund of value, or of 
value expressed in terms of money. While there is no objec- 
tion, to continuing to speak of investing capital, when one is 



158 PRINCIPLES OF POLITICAL ECONOMY 

only exchanging money for other forms of capital, still one 
must be on one's guard against assuming that capital is any- 
thing else than goods. It is well to remember also that stocks, 
bonds, mortgages, etc. are not capital, but only evidences of 
ownership of capital. The shares of the stock of a railroad 
company, for example, are not themselves capital ; they are 
only evidences of ownership in the railroad itself, which is the 
real capital. 

Another reason which leads naturally to thinking of capital 
as a fund of value is found in the fact that capital, like all 
wealth, is measured in terms of value and its quantities ex- 
pressed in terms of money. There is no good way of saying 
how much capital there is in any community or in the possession 
of any individual except by saying it in terms of money. If 
any capitalist were asked how much capital he possessed, and 
he were to answer in terms of tons, or cubic feet, or yards, or 
any other unit of physical measurement, he would not convey 
any clear or definite idea. Therefore, if you ask any business 
man to state how much capital he uses in his business, he can 
only answer you intelligently by saying so many dollars or so 
many dollars' worth. This is a mere quantitative expression. 
If, however, you were to ask him in what his capital really con- 
sists, he could only answer you intelligently by giving you an 
inventory of the various goods which make up his fund of 
capital. The only exception to this case would be the money 
lender, whose capital consists solely of money. 

Pure capital and capital goods ; pure weight and weighty 
objects. One may, however, reject the idea that capital is money 
and still persist in the idea that it is a fund of value. The dis- 
tinction has sometimes been made between pure capital and 
capital goods, pure capital being a fund of value embodied in 
the goods, and capital goods being the things themselves in 
which that fund of value is embodied. The value of the 
goods is not capital any more than the weight of an object 
is the object itself. As stated above, value is the attribute 



CAPITAL 159 

which we use in trying to arrive at a quantitative conception 
of the real goods. It is the only attribute which they all possess 
in common and which at the same time indicates their ability 
to serve the owner's needs. The value, however, is only a 
symptom of that ability, and not a cause of that ability. 

The function of productive capital is to aid in production. 
Except in the case of money it is not the value of the goods 
which enables them to do their work. The value is only a 
symptom of the fact that they are doing that work. A pro- 
ducers' good which ceased to aid in production would lose its 
value ; a producers' good which continued to be a real aid 
in production would retain its value. The value would be the 
shadow of the real thing and not the substance. Land also 
has value if it is productive. But it is not the value which 
makes it productive ; it is its productivity which makes it valu- 
able. In this respect capital and land are similar. In the case 
of that special kind of capital known as money, and in this 
case alone, its usefulness, its ability to function, depends upon 
value ; in every other case its value depends upon its usefulness 
or its ability to function. 

Capital the result of working and waiting. The next ques- 
tion to arise is. How does capital come into existence .? If it con- 
sists of tools, buildings, machines, equipment, etc., it is rather 
obvious that they come into existence because labor is expended 
in producing them. But this does not tell the whole story. In 
order that any community may come into possession of a larger 
stock of tools and equipment, it must, temporarily at any rate, 
divert its labor force from the production of consumers' goods 
into the production of these producers' goods. Whether it be 
a communistic society or an individualistic society, this physical 
fact remains the same. In a communistic society, if the stock 
of capital goods is to be increased, some labor must be put to 
work making tools, machines, buildings, equipment, etc., and 
just that much less labor will be available during that time for 
the production of consumers' goods. During this period the 



i6o PRINCIPLES OF POLITICAL ECONOMY 

community as a whole will have fewer consumers' goods than it 
otherwise might have had. Of course, the expectation is that 
the tools and equipment, after they are produced and put to 
use, will again add to the total production. This, however, in- 
volves a certain amount of postponement of consumption. The 
community as a whole decides that it will have fewer con- 
sumers' goods in the present or immediate future in order that 
it may have more in the distant future. There is no possibility 
of evading this physical necessity. 

In an individualistic society, however, though the same phys- 
ical necessity exists, the process is slightly different. Any indi- 
vidual may decide that he will consume a little less in the 
present or the immediate future in order that he may have a 
little more to consume in the distant future. The way he does 
this is to save and invest, or else to turn aside, as may have 
been done in very simple states of society, from the work of 
gathering consumers' goods in order to apply himself to the 
work of making tools. 

Making tools rather than consumers' goods. A primitive 
fisherman has frequently been used as an illustration of this 
simple process. He has been in the habit of catching fish 
with very simple tackle, but he sees an opportunity of increas- 
ing his catch if he can only get some kind of boat, so he 
decides to spend a part of the time each day in making one. 
By this combination of frugality and industry he eventually 
comes into possession of a boat which thereafter adds to his 
income and more than compensates him for the frugality which 
he practiced during the period in which the boat was building. 
This case is doubtless real enough to serve as an illustration 
of the essential process of increasing the stock of capital. 

It has not been many generations since farmers used very 
crude and simple implements, some of which they could make 
for themselves. The farmer who made his own plow was 
depriving himself of the opportunity for amusement, which 
is a kind of consumption, or was reducing somewhat his 



CAPITAL i6i 

consumption of material goods during the period when the 
plow was being made. After it was finished, it assisted him in 
producing subsistence, and added to his income available for 
consumption. This is in all essential particulars similar to the 
case of the primitive fisherman. A little later, however, the 
farmer, instead of making his own plow, hired a blacksmith 
to make it, paying the blacksmith money for his work. Here 
we have the same combination of labor and frugality as in 
the other cases, the difference being that in the making of the 
plow the blacksmith does the laboring and the farmer exercises 
the frugality. With the money which he paid for the plow he 
could have bought consumers' goods and had immediate 
enjoyment. He postponed that enjoyment when he paid the 
money to the blacksmith and received the plow. In the then 
distant future, however, the plow added to his income and 
enabled him to make up for the loss of opportunity for imme- 
diate consumption, and thus compensated him for the post- 
ponement which he underwent when he purchased the plow. 
The modern farmer, however, instead of hiring the black- 
smith to make the plow, usually buys his plow ready made. So 
far as he is concerned, the act of frugality is the same as though 
he deliberately hired the blacksmith to make it. He surrenders 
a certain amount of ready cash with which he might have 
bought consumers' goods ; he receives the plow, which for a 
period of years will add to his income and therefore compensate 
him. In the making of the plow, however, there were other 
tools used, as well as labor. Those other tools had been made 
in much the same way as the plow. Someone had invested 
money in them and then hired other labor to use those tools in 
the making of the plow. It has become, therefore, a very compli- 
cated process ; but anyone who will analyze the process will 
find always the same two factors involved : namely, waiting 
and working, — the postponement of consumption, on the one 
hand, and labor, on the other. No capital can ever come into 
existence without this combination. It is merely obscured by the 



l62 PRINCIPLES OF POLITICAL ECONOMY 

intricacies of the modern industrial process, and it requires a 
little more intelligence and study to see clearly where and how 
the frugality and the labor are combined. 

Separation of the functions of working and waiting. In the 

highly complicated industrial system of the present, with its 
increase of specialization, the two functions of waiting and 
working are generally performed by different persons or classes 
of persons. This has given rise to some of the most intricate 
and most difficult of our social problems. In a simpler state, in 
which the same individual exercised both functions, no social 
or class antagonisms were developed. Even in the intermediate 
stage, when the farmer bought his plow from the blacksmith 
and then used it himself, and the blacksmith bought his own 
tools and used them himself, we find both functions performed 
by the same individuals. Class antagonisms could hardly develop 
under these conditions. But when, as in the modern industrial 
system, the capitalist lives mainly from the income of his capi- 
tal, and the laborer mainly from the wages of labor (in other 
words, when the two functions are sharply separated), class 
feeling and class antagonism have developed. It has come 
about in our urban industries that the average person who per- 
forms manual labor receives his wages in weekly installments 
and spends them mainly for consumers' goods, whereas the 
very tools with which he works are owned by other men who 
have specialized in the function of investing their money in 
capital ; that is, in tools and equipment. 

Separation of the function of the laborer and the capitalist. 
Capital has existed, of course, as long as tools and equipment 
have existed, but this separation of the two functions, that of 
the laborer and that of the capitalist," has become general only 
since the rise of machine production. Before that time the 
function of the capitalist was not important enough to create 
an opportunity for many men to live exclusively by the per- 
formance of this function. Not enough capital was needed 
in the primitive forms of industry which preceded the present, 



CAPITAL 163 

to enable a large number of men to live on its earnings. It 
is this fact which is probably meant when it is erroneously 
stated that capital in the modern sense came into existence 
with the rise of machinery. Capital in the modern sense does 
not differ from capital in the former or capital in the ancient 
sense ; it differs only in the sense that there is more of it and 
more needed. This combination of facts — the fact that there 
is more needed than ever before and that there is more of it 
supplied than ever before — has created what we call the 
capitalist class in modern industry, and that is a matter of the 
very greatest importance. 

Coordinating labor which is performed at different times. In 
a somewhat special but very important sense we may say that 
the function of capital is to aid in production by coordinating 
labor which is performed at different times. In the chapter 
on The Division of Labor it was pointed out that there are 
two distinct forms of the division of labor ; namely, the con- 
temporaneous and the successive. Under our modern indus- 
trial system the successive division of labor has been greatly 
lengthened out. In some cases many years elapse between the 
beginning of a process and the final completion of the pro- 
duction of a consumable article. There is a striking analogy 
between the lengthening out of the successive division of 
labor and the widening out of the contemporaneous division 
of labor. The latter has been brought about through im- 
proved means of communication and transportation. It is 
literally true at the present time that thousands of miles or 
even half the earth's circumference may separate men who 
are working for the production of the same article. The 
coordination of labor performed at such widely separated points 
of space is one of the most important and striking aspects 
of the modern industrial system. It is, however, no more 
important or striking than the similar coordination which has 
taken place between labor performed at widely separated points 
of time. 



1 64 PRINCIPLES OF POLITICAL ECONOMY 

There are various ways in which this coordination of labor 
performed at different times may be presented to the mind. 
In a primitive state of industry each unit of labor was per- 
formed by men working with few and simple tools. The tools 
may be said to represent labor performed in previous times. 
When the worker uses tools, his work in the present time is 
coordinated with the work of the man who made the tools. 
But since the tools were very few and simple, it would be 
correct to say that a given unit of present labor is being 
coordinated with a very small amount of past labor. Under 
modern conditions the average laborer is using more tools, as 
well as larger and more complicated tools, than were used by 
the primitive laborer. These large and complicated tools, like 
the primitive tools, represent labor performed at a previous 
time. The labor of the workmen using them is literally being 
coordinated with the labor of the men who made the tools. 
Since the tools are so numerous, large, and complicated, it is 
correct to say that a given unit of present labor is being 
coordinated with a large amount of past labor. 

One of the fundamental changes which have come about as 
a result of the modern system of machine production is that 
of coordinating a given quantity of present labor with a much 
larger amount of past labor than was the case under simpler 
conditions. That is to say, in a simple state of industry a given 
quantity of present labor would work in coordination with a 
small amount of past labor. At the present time, however, 
a given quantity of present labor is found to be working in 
coordination with a large quantity of past labor. 

The coordination of labor performed at different points in 
space does not take place of its own accord. It is done 
through agencies of transportation and communication. Simi- 
larly, the coordination of labor performed at different points of 
time does not take place of itself ; it takes place because 
of the willingness of men to wait, to spend their money for 
producers' goods rather than for consumers' goods. If no one 



CAPITAL 165 

were willing to wait, if no one were willing to postpone con- 
sumption, if everyone insisted on living from hand to mouth 
as the spendthrift does, there could be no effective coordination 
of labor performed at different times. 

Lengthening the process of production. In order that there 
may be tools, mines must be opened and ore extracted. No 
one wants ore for its own sake ; it is desired because it is a 
means of getting something in the distant future which will 
be desirable for its own sake. Ore must therefore be smelted 
and purified into iron and steel. Again, no one wants iron 
and steel for their own sakes, but solely because in the distant 
future these commodities will be the means of getting things 
that are desirable in themselves. Again, iron and steel must be 
made into tools. But no one wants tools for their own sakes. 
Tools are wanted only as they will help to produce things 
desirable for their own sakes. It is this constant looking 
ahead and taking thought for the future, accompanied by the 
postponing of present consumption in favor of future consump- 
tion, that makes possible the coordination of labor performed 
at different times. 

Combination of factors. Something more than frugality, 
thrift, and foresight are necessary, however. Without mechan- 
ical ingenuity, however frugal, thrifty, and forethoughtful a 
person might be, he would find it difficult to exercise these 
qualities profitably. Unless someone were able to invent 
superior methods of 'production which required the exercise of 
those qualities, they would be of comparatively little economic 
advantage to those who possess them. 

Here we have an example of a class of cases which con- 
tinually perplex the amateur student of economics. There are 
cases where two or more factors are absolutely necessary to 
get a given result. Fundamentally the problem is no more 
obscure than that involved in the formula 2 x 3 = 6. The 
students will agree that 2 is just as essential as 3, and 3 as 
essential as 2, in getting 6. Other problems of a similar kind 



1 66 PRINCIPLES OF POLITICAL ECONOMY 

are found in every field of science as well as in arithmetic. 
Oxygen and hydrogen are equally necessary to the formation 
of water ; air and gasoline must be mixed in the carburetor in 
order that there may be an explosion in the gasoline engine. One 
is as essential as the other. The upper and the nether millstone 
must work together in the old-fashioned mill to grind wheat. 
Two sets of rollers are necessary in the modern flour mill. 

In the higher realms of economics we find numerous exam- 
ples of the same type of problem. Forethought and inventive- 
ness are examples of mental qualities which are combined to 
secure mechanical progress. However inventive men may be in 
contriving mechanical improvements, unless someone is willing 
to perform labor long in advance of the consumption of the 
products of these mechanical improvements, or pay someone 
else for performing that labor, all these mechanical contrivances 
will remain either in the brains of the inventors or in museums. 

When one has spent his money for iron ore, or for tools of 
any kind, one has become a capitalist. He has bought some- 
thing of no immediate use to him as a consumer, but something 
which is a means by which in the future he may get consumers' 
goods. Because there are, in any community, men who are will- 
ing to do this, there is a market for the genius of the inventor. 
Similarly, because inventors will devise mechanical appliances 
and improvements, there is opportunity for the investor to 
become a capitalist, — a buyer of tools and contrivances. 

These two functions, that of the inventor and that of the in- 
vestor, are absolutely necessary, whatever the type of social organ- 
ization may be. Even in a communistic society the work of the 
inventor amounts to nothing unless the society as a whole 
undertakes what, in the present order of society, the individual 
capitalist undertakes ; namely, to set men to work at making 
tools, and to pay them wages while they are about it. One im- 
portant difference between socialism and individualism is this: 
socialism proposes that society as a whole shall do precisely what 
in an individualistic society the capitalist does as an individual. 



CAPITAL 167 

The productivity of capital. There are some extreme social- 
ists who deny that the capitalist performs any necessary func- 
tion. If that were true, it would be hard to frame an argument 
to show that society as a whole should do precisely what the 
capitalist is doing. The socialist would then have to admit that 
the capitalist, instead of performing a useless function, performs 
a most important one, — so important that society as a whole 
should take it over. To say that society should do its own 
investing is to say that it should become its own capitalist. 
This would present a question to be debated. The question 
might be stated as follows : Can the useful function of coordi- 
nating labor performed at different times be done more economi- 
cally and satisfactorily by the state, or by the society as a whole, 
than by private individuals ? Or the question might be put in 
this way : What forms of investment and ownership should 
be undertaken by society as a whole, and what should be left to 
private individuals ? Only extremists would refuse to discuss 
this question. There are, however, some who are so very ex- 
treme as to deny that the state or society should do any invest- 
ing or own any capital. Others go to the opposite extreme by 
denying that the individual should do any investing or own 
any capital. Wisdom probably lies somewhere between the two 
extremes. The real difference, therefore, between the reason- 
able individualist and the reasonable socialist is one of degree. 
The reasonable individualist will maintain that, in the absence 
of a special or convincing reason to the contrary, the individual 
should be allowed to invest and to own capital, and that the 
case must be proved against him before he is forbidden to do 
so. The reasonable socialist, on the other hand, holds that the 
presumption is in favor of public and against private ownership 
of capital, — that unless special and convincing reason to the 
contrary is shown, the public and not private individuals 
should own capital. He places the burden of proof on the 
one who wishes to own private capital. 



CHAPTER XIV 

THE ORGANIZATION OF BUSINESS 

Large capital necessary. The growth of machine production 
has made necessary such large aggregations of capital as to 
require the combined accumulations of numbers of men. In 
comparatively few cases does a single individual possess enough 
capital to equip a modern factory, railroad, steamship company, 
mine, or even a large mercantile house. Were it not possible 
to combine the capital of a number of individuals, large-scale 
production would be the privilege of only a few very wealthy men. 

Methods of combining capital. There are three distinct 
methods of combining capital. One is known as the partner- 
ship, another is the corporation, or joint-stock company, and 
the third is the cooperative society. The partnership is a mere 
combination of two or more individuals in the ownership and 
management of a given business, in which each partner is 
fully responsible for the acts and liabilities of the group. The 
partnership is merely an enlargement of the individual. The in- 
dividual who owns and operates his own business is of course 
fully responsible for all debts and obligations, and, subject to 
bankruptcy and homestead laws, all his property may be taken 
in payment of any obligation incurred in the business. Where 
two or more men join together in a partnership, each partner is 
responsible in the same sense and to the same extent as he 
would be if he were the sole owner. 

Difficulties of partnership. Obviously a partnership on these 
terms is possible only among men who are very intimately 
acquainted with one another and who have complete confidence 
in one another. Since each partner is fully responsible for the 
acts of every other, it would be extremely hazardous, not to 

i68 



THE ORGANIZATION OF BUSINESS 169 

say foolhardy, for anyone to form a partnership with an indi- 
vidual with whom he was not intimately acquainted and concern- 
ing whose honesty and solvency he had the slightest suspicion. 
Incompetent or dishonest partners have caused the financial 
ruin of many an otherwise sound and capable business man. 

The corporation. The modern expansion of business would 
hardly have been possible without some form of organization 
which would permit the association of larger numbers of men 
than are possible under a partnership. This has given rise to 
the corporation, or the joint-stock company. The distinguishing 
difference between the corporation and the partnership lies in 
what is known as limited liability. In a corporation the liability 
of each shareholder is strictly limited. The corporation may 
become bankrupt, but the individual members or shareholders 
can be called upon only for definite sums to make good the 
debts of the corporation. In the ordinary case, each individual 
puts a certain sum of money into the fund. This may be lost, 
but he cannot be called upon for additional sums to make good 
further losses. In other cases, such as our national banks, 
the shareholder may not only lose what he has put into the 
fund but may be assessed an equal amount in addition. This 
is sometimes called double liability. 

Suppose, for example, it were considered necessary to have 
;^ 100,000 of capital with which to start a business. This 
capital may be divided into a thousand shares of ^100 each. 
(A larger number of shares of smaller denomination or a 
smaller number of larger denomination may, of course, be 
decided upon.) These shares are represented by bits of printed 
paper which serve as evidence to show that the money has 
been put into the fund. A thousand different individuals may 
buy one share each or a smaller number may each buy a 
different number of shares. For each $100 which any indi- 
vidual puts in, he receives one of these bits of paper, which 
come to be called shares or stock certificates or some other 
such name. After the shares are all sold, there is the fund 



I70 PRINCIPLES OF POLITICAL ECONOMY 

of $100,000 in money available for starting the business. The 
general rule is that each contributor shall have a vote for each 
share which he has purchased. It would therefore be possible 
for one individual to own more than half the shares, provided 
he had invested more than ^50,000 in the enterprise. Owning 
more than half the shares, he could always cast the majority 
vote and control the corporation, electing himself and his 
particular friends to all the offices, and virtually controlling the 
business. In some cases, however, such a concentration of 
ownership is not permitted. 

Limited liability. Only the officers of the corporation are 
empowered to act for the corporation ; the individual share- 
holder who is not an officer has no power to obligate the 
corporation in any way. One therefore does not need to 
scrutinize the solvency or the character of his fellow share- 
holders as closely as would be necessary in a partnership. 
Again, the individual shareholder has no responsibility for the 
acts of the corporation beyond that which has already been 
indicated ; that is, if the business fails, the affairs of the 
corporation may be wound up, but he can lose only the sum 
which he originally subscribed, or, in the case of double 
liability, that sum plus an equal sum. 

Some weaknesses of the corporation. This device of the 
joint-stock company with limited liability has made possible 
the aggregation of vast sums of capital, running up into mil- 
lions and hundreds of millions of dollars, for the purpose of 
carrying on great business enterprises. Individuals who never 
saw or heard of one another, living in different parts of the 
country, sometimes in different parts of the world, may own 
shares in the same corporation, having contributed their capital 
to the joint fund for the carrying on of the business. This 
has been one of the great factors in building up all modern 
enterprise. It is almost as important as some of the great 
mechanical inventions. But, like all great inventions, it 
carries with it certain difficulties. For example, it has made 



THE ORGANIZATION OF BUSINESS 171 

individual enterprise a practical impossibility, except in those 
cases where small-scale production is as efficient as large- 
scale production. On the other hand, it has given individuals 
with only small sums of capital to invest the opportunity to 
participate in the profits of large-scale production. In the 
latter sense it has been a democratic institution. The fact, 
however, that individuals vote in proportion to the number 
of shares which they own has tended to destroy some of the 
democracy and, in some cases at least, to put the management 
of the corporation into the hands of a plutocratic oligarchy ; 
that is, a few large shareholders, who control the majority of 
the stock, can always control the corporation, sometimes to the 
disadvantage of the small shareholders, who can never cast a 
majority vote. Various limitations upon the voting power have 
been proposed and introduced for the purpose of curbing the 
rapacity of the large shareholders. In spite of these, however, 
many a fortune has been built up through the machinations 
of large shareholders and the robbing of small shareholders. 

Multiplied power and divided responsibility. Another dis- 
advantage of the corporation is found in its impersonal character. 
A decade or so ago the social psychologists were engaged 
with the problem of the mob mind. Before the analysis was 
carried very far, it was discovered that the mob mind did not 
present any special mystery as distinct from the individual 
mind. The mob thinks and acts precisely as any of its indi- 
viduals would think or act were his power greatly increased 
and his sense of responsibility greatly diminished. That is 
precisely what the presence of numbers does for the individual 
when they are all moved by a common impulse ; it gives him 
a sense of power proportionate to the numbers, and at the 
same time the very fact of numbers diminishes his own sense 
of responsibility. That is why the mob is so like a monster, 
for the difference between a man and a monster is precisely 
that, — the monster feels a sense of power and does not feel 
a sense of responsibility. 



IJ2 PRINCIPLES OF POLITICAL ECONOMY 

Something of the same kind exists in the case of an indus- 
trial corporation. There also you have the circumstance of 
increased power combined with diminished responsibility. The 
sense of power comes not so much from the presence of 
numbers, as in the case of the mob, as from the larger fund 
of competitive capital which is brought together. The dimin- 
ished sense of responsibility comes partly from the mere fact 
of numbers (no individual member of the corporation feels 
the full responsibility for the acts of the whole), partly from 
the impersonal character of. the conduct of the corporation, 
and partly from the limited-liability feature of most of the 
charters. Most of the evils of corporation practice grow out 
of this simple situation, and the remedy must be applied at this 
point. The sense of responsibility must be made commensurate 
with the sense of power. 

This is to be accomplished, not by reducing the powers of 
corporations so much as by increasing the sense of responsi- 
bility of its individual members. If they can be made to feel 
the same responsibility for the acts of the corporation which 
they feel for their individual acts, the corporation problem as 
such will be solved ; and it will be solved in no other way. 
This means the frank adoption of the maxim that crime is 
always personal, and that corporate law-breaking is to be dealt 
with in precisely the same way as individual law-breaking. 

Size a matter of importance. In fact, it may be necessary 
to go even farther and enforce stricter responsibility upon 
members of corporations, particularly the larger corporations, 
than we do upon individuals. If the principle we have laid 
down is sound, it furnishes no support to the view that the mere 
bigness of a corporation is not a matter for the law to take into 
account. From our point of view, bigness is an important 
factor in the problem ; for the bigger the corporation, the 
greater its power and the less the sense of responsibility on 
the part of each member. That situation alone calls more and 
more for strict regulation and enforcement of responsibility, the 



THE ORGANIZATION OF BUSINESS 173 

bigger the corporation becomes. Its increased power is a 
good thing, provided that power be used productively and 
not acquisitively ; but there is no certainty that it will be 
used productively unless subjected to the strictest control. 

This does not mean that large corporations have worse dis- 
positions than small, or that their members are meaner men 
than the members of small corporations. It only means that 
the disproportion between power and responsibility increases 
with the size of the corporation. 

As a homely illustration let us take the common house 
cat, whose diminutive size makes her a safe inmate of our 
household in spite of her playful disposition and her liking 
for animal food. If, without the slightest change of char- 
acter or disposition, she were suddenly enlarged to the dimen- 
sions of a tiger, we should at least want her to be muzzled 
and to have her claws trimmed ; whereas if she were to 
assume the dimensions of a mastodon, I doubt if any of us 
would want to live in the same house with her. And it would 
be useless to argue that her nature had not changed, that 
she was just as amiable as ever, and no more carnivorous than 
she always had been. Nor would it convince us to be told 
that her productivity had greatly increased and that she could 
now catch more mice in a minute than she formerly could in 
a week. We should be afraid lest, in a playful mood, she 
might set a paw upon us, to the detriment of our epidermis, 
or that in her large-scale mouse-catching she might not always 
discriminate between us and mice. 

Stratification of society. There is another problem, not 
strictly a corporation problem, but a social problem growing 
out of the prevalence of the corporate form of industrial 
organization. That is the problem of the widening gap be- 
tween employers and employed, or, more strictly, between capi- 
talists and laborers. It may be laid down as a general social 
law that anything which separates people into sharply dis- 
tinguishable groups, whether it be a geographical boundary, a 



174 PRINCIPLES OF POLITICAL ECONOMY 

racial difference, a difference of religious creeds, or a class 
distinction, will produce, between the groups thus separated, 
first ignorance of one another, then suspicion growing out of 
that ignorance, then misunderstanding growing out of that igno- 
rance and suspicion, and finally open warfare whenever a pre- 
text is found ; whereas anything which bridges over these gaps, 
or brings people together regularly and normally, creates first 
knowledge of one another, then confidence instead of suspi- 
cion, then understanding instead of misunderstanding, and 
finally lasting peace because no difficulty seems large enough 
to serve as a pretext for war. 

Now the joint-stock form of organization, though a most 
effective industrial device, has had at least one serious social 
result : it has widened somewhat the gap which would other- 
wise have existed between the employing group and the em- 
ployed group. When employers are known by their personality 
and can come in some kind of personal or direct contact with 
employees, and when, therefore, employer and employee know 
something about one another, there can be no such degree of 
suspicion of one another as now exists ; where ignorance dis- 
appears, suspicion tends to disappear also. But when employers 
stand as the shareholders of a corporation in a purely imper- 
sonal relation to employees, when the average employer or 
shareholder knows nothing personal about the employees of 
the corporation, and the employees know absolutely nothing 
personal about the shareholding employers, there is on either 
side of the line about as great a degree of ignorance of those 
on the other side as can be found anywhere in modern 
social life. 

Widening the gap between social classes. That gap which 
separates the two groups is made so wide as to produce very 
much the same result as is produced by a difference of color 
between races or a difference of religion between too sharply 
contrasted religious groups. Such a state of things has never 
failed in the history of the world to produce suspicion, jealousy, 



THE ORGANIZATION OF BUSINESS 175 

misunderstanding, and, on the slightest pretext, open hostihty ; 
and, so far as we are able to see into the future, there is not the 
slightest ground for hoping that such a condition ever will fail 
to produce these same undesirable results. In other words, we 
need not hope for social peace or for any cessation of the con- 
flict of classes until that chasm is in some way bridged over or 
made to disappear. 

This result can hardly be achieved by doing away with joint- 
stock corporations ; they are too effective as industrial devices 
to make such a program tolerable ; but if we are ever to have 
anything resembling social peace, some way must be found to 
bring the employing classes and the employed into personal 
relationships one with another. The ideal is undoubtedly that 
of having the workers in our industrial establishments become 
also the owners of the stock of the corporation. If that result 
could possibly be achieved, there would be an end of the present 
phase of warfare. 

How this is to be achieved is another question. It will never 
be achieved until our corporation laws and our judicial pro- 
cedure relating to corporations are made efficient enough to 
make it a safe venture for a man of small means to buy a share 
in an industrial corporation. So long as these things are so 
inefficient as to enable large shareholders and rings to freeze 
out the small shareholders, or in any way to make it hazardous 
for a man of small means, such as the average workingman, 
to invest in a share, it will never be accomplished. This looks 
like a legal problem rather than a legislative problem, and it 
is for the legal fraternity and the courts to solve. If they will 
not solve it, or if they ultimately prove unable to solve it, it 
may be necessary to reform our courts. Many discriminating 
persons are beginning to believe that the judicial branch of our 
government, instead of being the most efficient, is less efficient 
even than the legislative or the executive. 

The trust. It is important that we distinguish between the 
corporation, as we have just described it, and the trust, or 



176 PRINCIPLES OF POLITICAL ECONOMY 

combine. The corporation is an organization of individuals who 
put their capital together in order to carry on a business which 
requires more capital than is likely to be possessed by any one 
of them. The trust, or combine, is mainly an organization of 
corporations (though it may also include a few individual capi- 
talists), for the purpose of controlling the market. While such 
organizations are to be distinguished sharply from corporations 
as such, nevertheless they could scarcely have come into exist- 
ence if the corporation had not preceded them and prepared 
the way. They may therefore be called extreme developments 
of the corporation idea, though not necessary developments. 
As to these extreme developments of the corporation principle, 
it is becoming more and more apparent that their power for 
evil lies wholly in their power of controlling and manipulating 
prices. If that power could be taken out of their hands, we 
should then have nothing to fear from them. 

Control of prices. If they could not succeed and survive in 
competition through their power over prices, they could then 
succeed only through their power of production. If they should 
then survive, the mere fact of their survival would prove their 
fitness to survive. This has been pointed out many times by 
scholars ; but the practical politicians, with their unerring in- 
stinct for the wrong way, have ignored it and have been trying 
various hard and useless methods of dealing with the problem. 
Eventually, after having tried every possible way of going wrong, 
we shall apply the simple and direct remedy of government 
control of prices wherever a monopoly exists. 

It is not necessary to indulge in any sentimental rhapsodies 
on the subject of the people and their control over affairs of 
this kind. Government affairs are controlled by politicians, 
and politicians are no more interested in the people than are 
the trust magnates themselves. The choice is a hard one. But 
where competition fails to regulate prices, these prices are 
going to be fixed arbitrarily by someone. In the absence of 
government control they are fixed by the trust operators 



THE ORGANIZATION OF BUSINESS 177 

alone. Where there is government control, they are fixed by 
the joint action of the politicians and the trust operators. Their 
interests are not the same, and, as the result of their pulling 
and hauling, prices will not be fixed quite so completely in the 
interest of the trusts, but more in the interest of the trusts 
and the politicians. Since the people can control the trusts after 
a fashion by refusing to buy of them, and the politicians after a 
fashion by refusing to vote for them, it will happen that through 
this double control the interests of the people will be somewhat 
better safeguarded than they are now. 

Incidentally this would destroy most of the trusts. No trust 
exists by virtue of its superior productive powers. Every one de- 
pends for its existence upon its superiority in buying or selling ; 
that is, upon its power over prices. Take away this power and 
enable the outside concerns to match their productivity against 
that of the trust, and outside competition will increase and 
force the trust to break up into its most efficient productive 
units, as distinguished from the most efficient bargaining units. 

The cooperative society. It has often been proposed to 
substitute a radically different form of business organization 
for the corporation, or joint-stock company. This is known as 
the cooperative society. In a sense the corporation itself is 
cooperative, but it differs from the cooperative society in two 
fundamental characters : 

In the first place, the corporation involves cooperation 
among the owners, whereas the cooperative society involves 
cooperation among the workers. In the chapter on Capital 
we saw that the rise of modern industrial conditions had 
brought about a sharp separation of owners and workers. In 
the original form of manufacturing (that is, the small shop, 
where the workman owned the shop and the tools) we had the 
function of ownership and of labor combined in the same 
individual. With the rise of the factory system these two 
functions were separated. The corporation represents the 
organization of owners, and maintains the separation of owners 



178 PRINCIPLES OF POLITICAL ECONOMY 

from workers. The cooperative society, on the other hand, repre- 
sents an association of workers. Under the corporation, owner- 
ship and management go together ; under the cooperative 
society, labor and management go together. 

In the second place, in a corporation, as we have seen, the 
various individuals who contribute capital vote in proportion 
to the number of shares which they own. In a cooperative 
society each individual has one vote, regardless of the number 
of shares which he owns or the amount of capital which he 
has put in. One man, one vote is the rule here, whereas one 
share, one vote is the rule of the corporation. It is inaccurate, 
however, to say that capital votes in a corporation. Only men 
vote, and a man may vote once for each share which he owns, 
or he may vote once and once only, regardless of the number 
of his shares. As to the comparative merits of these two forms 
of organization, the opinion of the world is somewhat divided. 
It must be admitted that the corporation has had much the 
larger growth, though in recent years the cooperative society 
has been gaining ground rapidly. 

Comparative merits of the corporation and the cooperative 
society. It is the opinion of the present writer that the ques- 
tion will always be decided on rather definite economic grounds. 
Where the difficult problem is that of. getting sufficient capital, 
he who supplies the capital must be placated ; that is to say, 
where everything else is easily obtainable, where there are always 
plenty of laborers seeking employment, plenty of raw material 
to be had, and buyers ready to buy the finished product, but 
where the limiting factor is capital and the puzzling thing is 
to know where to get capital, favorable terms must be offered 
to the capitalist and he must be allowed to have his way, or 
the capital cannot be secured. In the early stages of manu- 
facturing expansion, capital was the limiting factor. 

The limiting factor will dominate. Now and then conditions 
arise under which capital is not the limiting factor. Among 
farmers, for example, where a creamery is needed, it is never 



THE ORGANIZATION OF BUSINESS 179 

very difficult to raise capital enough to equip the creamery; 
the difficulty is to get business ; that is, to get the farmers to pro- 
duce the milk and sell the cream to the creamery. In these 
cases the producer of milk must be placated and persuaded to 
join the organization. He must therefore be given control. 
This gives rise to what is known as the cooperative creamery, 
in which the producing farmers own the plant, direct its 
management, and share in its profits. Such a creamery, how- 
ever, is cooperative only in a special sense. The men who 
work in the creamery are employed as other laborers would 
be employed in a privately owned factory of any kind. A 
cooperative store is likewise dependent upon custom. It is 
easier to get capital and to hire clerks and salesmen than it 
is to induce people to trade at the store. Therefore the 
patrons of the store must be placated and given control. The 
great cooperative societies, as pointed out in the chapter on 
Competition, have been societies where cooperative buying 
and selling was substituted for competitive buying and selling. 
That is, they have been mercantile societies. They do not 
represent cooperation among producers or among the workers 
in the stores and factories, for the workers in the stores 
and factories are hired on the same terms as workers in the 
privately owned or corporation owned stores and factories. 

There are a few cases of real cooperation, but they are not 
very conspicuous. The only real cooperation is cooperation 
among workers, where the men who do the work in a fac- 
tory manage it themselves or direct its management and fur- 
nish or hire the capital. This form of cooperation has not yet 
proved very successful, mainly because labor has seldom been 
the limiting factor. It is generally so easy to get labor that 
the laborer does not have to be placated and given much con- 
trol. When the time comes, as it probably will, when labor 
is scarce and hard to find, — when it is necessary to placate 
the laborer rather than the capitalist or the purchaser of finished 
products, — then we may expect that this form of cooperation 



1 80 PRINCIPLES OF POLITICAL ECONOMY 

will gain ground. If the laborer has to be placated in order 
to induce him to work in an establishment, he will be given 
more and more control over it. , 

Control by the indispensable person. Generally speaking, 
the indispensable man, whether he be the one who furnishes 
capital, the one who furnishes raw material (as in the case of 
the cooperative creamery), the one who buys the finished 
product (as in the case of the cooperative store), or the one 
who supplies the labor (as in the case of the true cooperative 
society), is in so strong a position that he can dictate terms 
to all the others. When the laborer becomes so indispensable, 
that is, so scarce and hard to find that the average business 
enterprise must wait on his will, he will be in so strong a posi- 
tion that he can dictate terms to all the others who participate 
in the enterprise. He will then, without resort to force, really 
direct its management on a purely voluntary and contractual 
basis. There is not a very good prospect for cooperation among 
laborers under any other conditions. There is a strong proba- 
bility that, with the rapid accumulation of capital (especially if 
habits of frugality and saving are encouraged) and with the 
growing scarcity of labor (especially if wise immigration laws 
are passed and a high standard of living among laborers is 
encouraged), there will come a time when capital will be almost 
superfluous because of its great abundance, and every individual 
laborer will become almost indispensable because of the scarcity 
of labor. Then we must expect that capital will lose the power 
to direct the management of industries and will take the posi- 
tion of a hireling. The laborer will then gain control and 
assume the position of the master. 



CHAPTER XV 

THE BALANCING OF THE FACTORS OF PRODUCTION 

Balanced rations, fertilizers, etc. Every farmer nowadays is 
familiar with the idea of a balanced ration for his live stock and 
a balanced fertilizer for his soil. Students of human dietetics 
are also familiar with the idea of a balanced ration for man. 
By a balanced ration is meant one which contains the different 
food elements in the proportion in which the body needs them. 
By a balanced fertilizer is meant a fertilizer which contains the 
different elements of plant food in the proportion in which 
plants need them. Sometimes, however, a balanced fertilizer 
may mean a fertilizer which will balance up the soil and put 
into it the elements of plant food which it lacks, in order that 
it may possess those elements in the proportion in which plants 
need them. Thus, a soil that is rich in nitrogen but deficient 
in potash would need a fertilizer that was particularly rich in 
potash. Not long ago the writer was at the home of a pro- 
fessor of agriculture in one of our leading agricultural colleges. 
The grass was growing up between the bricks in the sidewalk 
in front of the agriculturist's house. As a demonstration he 
was using fertilizer to kill the grass. It was excellent fertilizer, 
and in the proper relation it would have made the grass grow 
more luxuriantly. He simply put on too much. The .result of 
this bad balance was to kill the grass. In addition to those 
elements of plant food which ordinarily go into the fertilizer, 
moisture and other factors are required. If there is too much 
of one and too little of another factor, plants will not grow. 
Everyone is familiar with the fact that on swampy land plants 
will not grow because there is too much water, and that on 
desert land they will not grow because there is too little. 

i8i 



1 82 PRINCIPLES OF POLITICAL ECONOMY J 

Balanced ingredients. All these facts are mentioned to make 
it perfectly clear to the student that in almost any line of pro- 
duction the question of the balance of the factors of production 
is a very important one. All the factors may be present, but if 
they are not in the right proportions, production will be reduced 
or even destroyed. This is true not only of the elements of 
plant and animal growth, which are agents of production, but 
of tools, implements, raw materials, and other things which enter ' , 
into a mechanical industry. In the manufacture of old-fashioned 
gunpowder, for example, charcoal, saltpeter, and sulphur were 
required, and they had to be combined in fairly definite propor- 
tions. If it happened that there was more charcoal on the 
market than would combine with the limited supply of one 
of the other ingredients, say saltpeter, the production of gun- 
powder was limited by the small supply of saltpeter and not 
by the supply of charcoal. Only as much gunpowder could 
be manufactured as the small supply of saltpeter would permit. 
In the making of old-fashioned mortar, lime and sand were 
required. Too much of either one or too little of the other 
would spoil the mortar. If in any given situation there should 
happen to be a scarcity of sand, very little lime could be used, 
because only as much mortar could be made as the limited sup- 
ply of sand would permit. Again, however abundant both lime 
and sand might be for the making of mortar, if brick and stone 
were scarce, very little mortar could be used, and there would 
therefore be very little productive demand for sand and lime. 

Balanced agents of production. This principle applies not 
only to the raw materials which are used in various lines of 
production, but to the active agents themselves, such as labor. 
However numerous the hodcarriers might be, if there were a 
great scarcity of brick and stone masons, not many hodcarriers 
could be used. The farmer who had plenty of land and tools, 
but no horses, oxen, or tractors, would not be able to use either 
his land or his tools effectively. If he could not raise the money 
in any other way, it would pay him to sell some of his tools or 



BALANCING OF FACTORS OF PRODUCTION 183 

some of his land and buy horses, in order to restore the balance. 
At bottom this is much the same problem as that of balancing 
rations or fertilizers. Again, however much land he might pos- 
sess, if he lacked equipment, his farm would not be very pro- 
ductive. It would pay him, if he could not raise the money in 
any other way, to sell some of his land "in order to buy equip- 
ment of various kinds. Some of our frontier farmers found 
themselves in possession of a soil which was very rich in plant 
food. They lacked, however, other forms of capital, or the 
money wherewith to purchase building materials, machinery, 
live stock, etc. Many of them virtually sold their surplus soil ; 
that is, they grew such crops as they could, sold them off, and 
took no pains to replace the fertility which was used up in the 
growing of the crops. They are said to have '' mined the soil " ; 
that is to say, as the miner extracts his mineral and puts noth- 
ing back, so many of these frontier farmers extracted plant food 
and put nothing back. Whatever may be said of this from the 
point of view of national policy, it was, under the circumstances, 
undoubtedly good business from the point of view of the farmer. 
He was trying to balance up his establishment. Having an 
abundance of plant food in his soil, but very little of anything 
else, he found it to his advantage to sell some of his plant 
food in order to put up houses, barns, and fences and purchase 
machinery and live stock. He was doing virtually the same 
thing that another farmer would do who found himself in the 
possession of a large number of horses and no plows or har- 
rows to which to hitch his teams. It would pay him to sell off 
some of his horses and buy enough equipment to make the 
remaining horses productive. 

A balanced nation. This principle of balancing up the factors 
of production is just as important for the nation as a whole as 
it is for the individual farmer or manufacturer. The country 
which possesses a surplus of land and a scarcity of labor will 
find that its land is very ineffectively used. What it needs is 
more labor. It cannot very well sell its land, but it will in all 



1 84 PRINCIPLES OF POLITICAL ECONOMY 

probability pursue a policy which will increase its labor supply. 
Labor under such conditions will be in great demand, and for the 
same reason that, in dietetics, protein will be in great demand 
if it is scarce while the other food elements are abundant. In 
such a community land is certain to be cheap and labor dear. 
The high price of labor, the ease with which men can estab- 
lish themselves on the land as independent farmers, or get re- 
munerative work, encourages early marriages and large families. 
This is especially true on the farms, where labor is scarce and 
land abundant. Every additional child is money in the farmer's 
pocket, because as soon as the child is old enough to work he 
helps to solve the ever-present problem of scarcity of labor. 
Immigration is also likely to be encouraged by such a country. 
And thus from two sources the labor supply is increased in 
response to the effort to balance up the factors of production. 

But tools and equipment of all kinds, which are generally 
included under the word capital, are almost, though not quite, 
as essential as either labor or land. If capital is scarce while 
one or both of the other factors are abundant, it will be in 
great demand, for the same reason that labor is in great demand 
where it is scarce and land abundant, or that water is in great 
demand where there is an abundance of land with all the ele- 
ments of chemical fertility, but a scarcity of water. An over- 
populated country, on the other hand, finds itself with a badly 
balanced industrial system, but the balance is in this case dis- 
turbed in the opposite direction. Land being the scarce factor, 
every acre that can possibly be used is of the utmost impor- 
tance. Labor, on the other hand, is cheap. It can easily be 
spared. If it sees fit to migrate to other countries, no great 
effort is made to prevent it, and no high price is offered it as 
a reward for staying at home. Under such circumstances, to 
hold an acre of land out of use would seriously reduce the 
total production of the community. 

Balanced capitaL As on the farm or in the factory we saw 
that different kinds of tools have to be combined, so we should 



BALANCING OF FACTORS OF PRODUCTION 185 

find that different kinds of capital, or tools, have to be combined 
in the nation at large. If, for any reason, the country should 
find an oversupply of one class of tools, say agricultural 
implements, and an undersupply of another class of tools, say 
railroads and rolling stock, the productive power of the whole 
nation would be limited by the deficiency of transportation 
facilities. However much might be produced with the agri- 
cultural implements, if it could not be transported to market, it 
would be of little use. This would be a case of badly balanced 
national capital. The result would be that the industrial system, 
if it were a good system, would find some way to restore the 
balance. It would be poor economy, under such circumstances, 
to increase the production of agricultural machinery. That would 
add very little to the total producing power of the nation. If 
something could be added to the transportation facilities, that 
would add considerably to the productive power of the nation. 
Under a well-organized industrial system the readjustment 
takes place automatically. Farm implements become cheap. 
F^'armers do not care to buy any more, and the manufacturers 
are discouraged from production. Railroad-building, however, 
is stimulated by the high earnings of the existing railroads, 
and the productive energy of the community is diverted from 
the manufacture of agricultural implements to the building of 
railroads and the manufacture of railroad equipment. 

If we reverse the supposition, of course we get the opposite 
results, but the same principles will be at work. If we should 
find an overabundance of railroad facilities and a scarcity of 
agricultural implements, then it would be to the interest of the 
country to have more agricultural implements. If the existing 
transportation facilities could easily carry all that the farms pro- 
duce, and more too, little would be added to the national 
product by building more railroads, and much could be added by 
manufacturing more farm equipment and increasing the growth 
of crops. The low earnings of railroads and the increased 
demand for farm machinery would tend to divert the productive 



1 86 PRINCIPLES OF POLITICAL ECONOMY 

power of the nation from railroad-building to the manufacture 
of farm implements and the use of them on the farms. 

This principle is of universal application, and thousands of 
illustrations could be multiplied if it were necessary. If we 
apply it to the railroads themselves, we find it working in the 
utmost detail. When a railway system does not have rolling 
stock enough to utilize its tracks, its capital is badly balanced, 
and naturally the thing to do is to get more rolling stock and 
more freight, in order to utilize the trackage advantageously. 
In other cases the road may find itself with more rolling 
stock and more business than can be done effectively on its 
existing trackage. It must then begin adding to its trackage 
rather than to its rolling stock, in order to restore the balance. 

The fundamental problem of scientific management. The 
fundamental problem of all management, whether it be the 
management of a diet kitchen, a farmer's feeding lot, a farm 
as a whole, a factory, a railroad, or a nation, is the problem of 
balancing the factors of production. The problem of managing 
the nation is commonly called the problem of statesmanship, 
and the fundamental problem of all statesmanship is that of 
balancing the factors of national life. To have so much produc- 
tive power as to tempt barbarians from the outside to invade 
and rob, and so little military defense as to be unable to repel 
barbaric invasions, is to invite national disaster. On the other 
hand, to maintain so large a fighting machine as to interfere 
seriously with the work of production is also bad statesmanship, 
because it preserves a bad balance of the factors of national 
life and prosperity. To encourage immigration and the multi- 
plication of numbers beyond the point necessary to utilize the 
land effectively also produces an unbalanced situation. To dis- 
courage immigration or the multiplication of numbers to such an 
extent as to leave the land inadequately utilized is equally bad. 

A balanced population. The greatest danger of all, however, 
and the one which, apparently, is least appreciated by some of 
our statesmen, is that of producing a badly balanced population. 



BALANCING OF FACTORS OF PRODUCTION 187 

At the beginning of this chapter the question of the balancing 
of the hodcarriers and the brick and stone masons was men- 
tioned. This may be taken as typical of the necessity of 
balancing skilled labor and unskilled labor. To have more 
unskilled labor than can be used effectively with the limited 
supply of skilled labor is quite as bad as to have more people 
than can be supported on the land, or fewer people than are 
necessary to utilize the land. To have more manual labor 
than will effectively combine with mental labor, to have more 
mental laborers who are capable of doing only routine work 
than will combine effectively with those mental laborers who 
possess originality, inventiveness, and the power of leadership 
is also to produce a bad balance. 

Probably the most important of all problems of statesman- 
ship, and at the same time one of the most difficult, is that 
of balancing up the population so that no particular class of 
labor is either oversupplied or undersupplied with respect to 
any other class. One method of preserving the balance is by 
education and vocational guidance. Training men for the 
occupations where men are needed, as evidenced by the high 
wages and salaries paid, is one of the quickest and most effec- 
tive ways of preserving the balance. Whenever any occupation 
is so undermanned as to make it difficult to find workers, 
wages or salaries will tend to rise. This increase in remunera- 
tion is then a standing invitation to young men to prepare 
themselves for that work, and a properly conducted education 
system is a standing opportunity to young people to prepare 
themselves to accept the invitation. 

Differential rates of multiplication. A wholesome moral life 
would also be a powerful agency working in the same direction. 
Those who have demonstrated that they are needed by the fact 
that they can fill good positions for which there is a demand, 
and for which high wages and salaries are offered, are the 
ones who ought to reproduce their kind most abundantly. 
Unfortunately, in most modern communities, they are the very 



1 88 PRINCIPLES OF POLITICAL ECONOMY 

people who multiply least rapidly. On the other hand, those 
who have demonstrated that they are more or less superfluous 
because they can do only a kind of work which is oversup- 
plied, and who therefore find difficulty in getting work at all, 
and can earn only low wages when they do get it, ought, 
from the standpoint of a balanced population, to multiply least 
rapidly. Unfortunately they are frequently the very people 
who multiply most rapidly. This differential rate of multiplica- 
tion helps to perpetuate a badly balanced population in spite 
of all the efforts of all the schools toward an occupational 
redistribution of population and a restoration of the balance. 

Geographical redistribution of population. That more land 
is better for a growing population than less land is the theory 
on which a great deal of the history of the world has been 
constructed. The migrations of peoples in search of more 
land is one of the large aspects of human history. There could 
be no possible object in seeking more land, instead of remain- 
ing content with the land in the possession of the people, were 
it not for the fact of diminishing returns. Therefore a very 
discriminating writer ^ has stated the opinion that the law of 
decreasing returns is the fundamental fact of human history. 
The effort of a growing population to acquire more land is, 
from the standpoint of the present chapter, merely an effort to 
restore the balance between factors of production. In any given 
state of civilization too dense a population, that is, too much 
labor and too little land, works to the disadvantage of the 
people. When they begin to perceive that they would be better 
off if they had more land, nothing except the strong military 
guard or a Chinese wall will prevent emigration. 

Migration of capital. But capital follows the same law as 
population. In a community where the land and labor are not 
properly balanced up with an adequate supply of capital, the 
perception of a need for more capital, that is, tools and 

1 Edward Van Dyke Robinson, " War and Economics," Political Science 
Quarterly, Vol. XV, pp. 581-622. 



BALANCING OF FACTORS OF PRODUCTION 189 

equipment, is likely to be pretty clear and definite. This leads to 
the offer of high rates of interest as an inducement to capital 
to migrate from other communities where it is abundant in order 
to supply those communities where it is scarce. The possibility 
of using each and every unit of capital advantageously is what 
enables borrowers to pay the high rate of interest. The scar- 
city of capital relatively to other factors is what creates the 
opportunity for advantageous use of capital. The formula, 
'' More capital, more product ; less capital, less product," is appre- 
ciated with peculiar vividness. This appreciation leads to active 
bidding for capital, and this to the offer of high rates of 
interest. The fortunate individual who can gain possession 
of an additional fund of capital, being able to increase his 
product considerably, finds it economical to pay a high rate of 
interest for it. If he owns his own capital, whereas his com- 
petitors in production lack capital, he will have a great advan- 
tage over them and will therefore secure a large income. 
According to our analysis in the chapter on The Source of 
Interest, this additional income which he gets from the use 
of his own capital is interest as truly as the income which he 
gets from lending his capital to someone else. 



SECTION B 

THE PRODUCTIVE INDUSTRIES 

The chief methods by which the productive forces are made to work for 

our advantage 



19] 



bJO ^ 
bp C C "S c 







19^ 



CHAPTER XVI 

THE EXTRACTIVE INDUSTRIES 

Ways of acquiring wealth. In the diagram on the preced- 
ing page the ways of acquiring wealth are divided into two 
main classes, the uneconomical and the economical. From the 
social or national point of view it is uneconomical to have 
men acquiring wealth by methods which do not add to the 
total wealth or well-being of the society or the nation. When 
one man gains something by plundering, swindling, counter- 
feiting, or monopolizing, someone else loses a like amount, and 
nothing is added to the total. In fact, if these harmful methods 
become general, it is likely to discourage honest industry and 
actually diminish the total production of wealth. Even the 
neutral methods may become harmful if they result in wasted 
lives ; that is, if they enable men and women who would other- 
wise be productive and useful to live in idleness and luxury. 
The smaller the proportion of the people who live by means of 
the uneconomical methods, the more prosperous the nation is 
likely to become. 

By the economical ways of acquiring wealth are meant all 
those ways by which an individual contributes to the wealth of 
the whole community as much as he gets. He may make his 
contribution by laboring either to produce commodities or to 
render direct service to some of his fellow men. In either case, 
where he gives honest service for honest pay he is enriching 
someone else in proportion as he is himself enriched. A nation 
in which this rule prevails universally, where everyone is con- 
tributing to the well-being of someone else in exact proportion 
as he himself prospers, has at least one of the conditions of 
general prosperity. If each one is capable and well trained, 

193 



194 PRINCIPLES OF POLITICAL ECONOMY 

so that he can give efficient service, that is, if he contributes 
largely to the prosperity and well-being of someone else, then 
everyone is prosperous, which is the same as saying that the 
nation as a whole is prosperous. 

Economical ways of getting wealth. The economical ways 
of getting a living are subdivided into three classes : first, the 
primary industries ; second, the secondary industries ; and, 
third, professional and personal service. The primary industries 
are those which produce commodities directly from their original 
and natural source, — which take material as nature provides 
it and appropriate it to some human use or change it from a 
form which is nonusable to a form which is either usable or 
one stage nearer to usableness. For example, the elements 
which produce plant growth are not, in their natural state, 
available for human use. The farming industry converts these 
elements into something which is either usable, as in the case 
of fruits and vegetables, or at least one stage on its way toward 
usableness, as in the case of grain or live stock. The mining 
industry brings the crude ore, which is not usable, into a condi- 
tion where it is either usable or at least one stage nearer usability. 
The secondary industries are those which take the products 
of the primary industries which are in need of further modifi- 
cation and carry them through the remaining stages on their 
way to final usability. The iron ore, for example, must be 
worked over many times before it becomes an automobile or 
the blade of a pocketknife. The coal must sometimes be 
transported long distances before it can warm our houses. The 
farmer's grain, besides being transported long distances from 
places where there is a surplus to other places where there is 
a shortage, must also be stored from threshing time until it is 
needed by the consumers ; and it must be ground into flour 
and baked into bread or manufactured into some other form 
of food before it is ready for use. 

Personal and professional services include all lines of work 
which do not directly produce salable commodities. Lawyers, 



THE EXTRACTIVE INDUSTRIES 195 

doctors, preachers, teachers, actors, barbers, and even policemen 
and congressmen, besides multitudes of others, are performing 
professional and personal services. Their labor has sometimes 
been called unproductive labor, merely on the ground that it does 
not produce vendible commodities. Though the writers who 
apply that term to them do not mean to cast any reflection upon 
them, always being careful to state that unproductive does not 
mean useless, nevertheless it seems better to avoid the use of a 
term which is so easily misunderstood. The important distinc- 
tion is not that between productive and unproductive labor, but 
between the economical and uneconomical ways of acquiring 
wealth. Even though the labor of the policeman does not directly 
produce a commodity, as the labor of a shoemaker does, for 
example, nevertheless the shoemaker and every other honest 
worker is helped to work better by the law and order which 
a good police system helps support. They are also helped by 
the physician, the teacher, and others who labor in the field of 
direct professional service. There is an ancient story of some 
musicians who formed a part of a captured army. They 
requested that they be set free by their captors, on the ground 
that they had not taken part in the fighting. The captors 
replied, '' By your music you inspired others to fight ; therefore 
you must be treated as though you were yourselves fighters." 
By a similar line of reasoning it could be said that if musicians 
inspire others to work, they are themselves workers and are 
contributing their part toward the national prosperity. 

The primary industries. The primary industries are them- 
selves subdivided into two classes, the extractive and the ge- 
netic. Extractive industries are those which mierely appropriate 
natural objects, without any attempt to replace what is taken or 
to keep up and increase the supply. The genetic industries, 
which might almost be called creative, are those primary indus- 
tries which make a conscious effort to replace that which is 
taken, and to increase the supply. Thus, hunting wild animals 
and grazing domesticated animals on free ranges are extractive, 



196 PRINCIPLES OF POLITICAL ECONOMY 

whereas tillage and stock breeding are genetic. Lumbering or 
cutting timber in a natural forest is extractive, whereas forestry, 
the scientific growing of timber, is genetic. Fishing in unstocked 
waters is extractive, whereas fish culture is genetic. Mining is 
extractive. There does not seem to be any genetic industry 
which bears the same relation to it as fish culture bears to 
fishing, or forestry to lumbering. 

Hunting. Of all industries hunting is the most primitive. 
It was sometimes combined with fishing as a means of sub- 
sistence. It usually included the search for edible fruits, nuts, 
and vegetables, as well as the killing of animals ; and it some- 
times even degenerated into a man hunt ; that is, the hunting, 
killing, and robbing of men. Where animals constituted the 
most abundant source of food, primitive men quite naturally 
hunted animals. Where fruits, nuts, and edible roots were 
abundant, it was not uncommon for the search for these foods 
to become the chief occupation. The hunting of animals led 
naturally to domestication and herding, and the search for 
fruits and herbs led quite as naturally to horticulture as the next 
stage in industrial development. Our own primitive ancestors 
seem to have been hunters, and later herdsmen, before they took 
up agriculture. The North American Indians lived mainly by 
hunting animals, though they had taken to the cultivation of 
crops on a small scale. They seem not to have domesticated 
any animal except the dog, before the coming of the white 
man. This direct passage from hunting to tillage, without an 
intermediate stage of herding, is considered somewhat excep- 
tional. The ancient Peruvians had domesticated the llama and 
the alpaca. The ancient Mexicans had become horticulturists 
apparently without having been herdsmen at all ; their primi- 
tive hunting seems to have consisted mainly in searching for 
fruits and herbs rather than for animals. 

Hunting, which includes trapping, has played an important 
part, and still plays an appreciable part, in our national economy. 
The abundance of game on our western frontiers, when we had 



THE EXTRACTIVE INDUSTRIES 197 

a frontier, was an important source of food for the advance 
army of settlers. The emigrants who crossed the great plains 
in the early settlement of the Pacific coast also benefited to a 
certain extent from the herds of buffalo, deer, elk, and antelope 
which at one time abounded. More important, however, was the 
regular business of trapping fur-bearing animals and of trading 
with the Indians for the skins and furs which they collected. 
A great deal of the history of our frontier, beginning with the 
first settlements on the Atlantic coast and continuing across 
the continent, has been a history of the fur trade. Relatively 
to her size and her other industries, the fur trade has been even 
more important in Canada than in the United States. Great 
companies such as the Hudson Bay Company and the North- 
west Company of Merchants of Canada were organized, which, 
especially during the eighteenth and early nineteenth century, 
swayed the destinies of that country and parts of our own 
Northwest. They maintained numerous trading posts and em- 
ployed thousands of men, who explored every nook and corner 
of the territory over which they operated. Similar though 
smaller companies were formed within the United States, to 
trade with our own Indians. Many of our Western pioneers, 
guides, and scouts, of whom Kit Carson was the most famous, 
began their careers as hunters and trappers for these various 
companies. The story of their adventures adds a romantic 
element to the early history of our Far West, but they were 
making their living by gathering furs to supply the demands 
of commerce. 

After the building of the transcontinental railroads across 
the great Western plains a rich harvest of buffalo skins was 
reaped for a few brief years. The lamentable result was that 
the buffaloes, or bison, as they are more properly named, which 
had roamed in countless numbers over those plains, were 
almost exterminated in the two decades from 1870 to 1890. 
It is doubtful if such a slaughter of noble animals ever took 
place before in the history of the world. 



198 PRINCIPLES OF POLITICAL ECONOMY 

As the country has become settled, fur-bearing animals, as well 
as other wild animals whose skins form articles of commerce, 
have tended to grow scarcer, though no such wholesale destruc- 
tion has overtaken any of the others (except the beaver) as that 
which overtook the buffalo. Most of them are small enough to 
find cover and sustenance for small numbers in the woods and 
fields of settled communities. Therefore hunting and trapping 
still supply a small fraction of our national income. The most 
valuable of all our inland fur-bearing animals, the beaver, has 
almost disappeared, along with the buffalo ; but minks, musk- 
rats, raccoons, opossums, skunks, foxes, and coyotes are still 
found in small numbers. The subarctic regions of Northern 
Canada and Alaska still yield considerable harvests of furs, while 
the seals which congregate in the Bering Sea, if adequately 
protected, may prove a valuable national asset. 

Fishing. While hunting, as a source of national wealth, tends 
to decline in importance as the country develops, fishing seems 
to increase. One reason for the decline of hunting is the sim- 
ple fact that land becomes too valuable for other purposes to 
be allowed to remain in its wild state as a refuge or feeding 
ground for wild animals. When it is turned to other purposes, 
most of them must of necessity disappear. The same is appar- 
ently true of many inland streams which once furnished small 
quantities of fish. But the larger lakes, and especially the oceans, 
furnish an almost inexhaustible supply of excellent food. As 
population and the demand for food increase, the harvest of 
the sea assumes a more and more important part in our national 
economy. According to the last estimate of the Federal Census 
there were in the United States, including Alaska, 7347 vessels 
engaged in the fishing industry; 166,343 persons were em- 
ployed, and the total value of the product was $75,029,973. 
The total value of the fisheries of the world is estimated at 
something over $480,000,000. 

We have as yet scarcely begun to realize the possibilities of 
this harvest of the sea. Practically every fish which lives in 



THE EXTRACTIVE INDUSTRIES 199 

these northern waters is good for food if properly prepared. 
Every decade we are discovering that some variety which has 
formerly been rejected is quite as good as any that we have 
hitherto prized. Thus far we have chosen only a few of the 
many varieties with which the sea abounds. 

Pasturage. It would be impossible to estimate how much 
the civilized races of the north temperate zone owe to such 
domestic animals as the horse, the ass, the cow, the sheep, 
the goat, and the pig. All these animals have, at one time or 
another, furnished food for man. The horse, the ox, and 
the ass have furnished that which has played almost as im- 
portant a part as food in man's conquest of nature, — namely, 
power. Before steam and electricity had been harnessed, 
or water power developed, these animals were almost the 
only sources of power besides human muscles. The skins 
of all were and are still utilized, there being no very good 
substitute for leather even to this day. The cow and the 
goat have furnished, and still furnish, milk, one of our most 
important articles of diet. The wool of the sheep is even now, 
next to cotton, the most important material for the manufacture 
of clothing. 

In their native state all these animals except the pig lived 
almost exclusively upon grass, either green or dried in the 
form of hay, and they still depend mainly upon it. Even the 
pig, with his omnivorous appetite and his accommodating 
stomach, will thrive on grass as his chief article of diet, though 
he needs some more concentrated food in addition if he is to 
make his best growth. Grass and grazing have therefore played 
a very important part in the economic life of that branch of the 
human race from which we are derived. Our ancestors were 
already herdsmen before they emerged from prehistoric dark- 
ness. All the animals now under domestication, and all the 
fowls except the turkey, were domesticated so long ago that 
we have no record as to where or when it occurred. It may 
give us a new respect for those prehistoric ancestors of ours 



200 PRINCIPLES OF POLITICAL. ECONOMY 

when we reflect that we have never succeeded in thoroughly 
domesticating any animal since we have had a history, though 
we may soon succeed with the zebra. There has never been 
a period, of which we have any record, from the earliest 
times to the present, when our branch of the human race 
did not depend for its subsistence largely upon the grazing 
animals. During the greater part of our historic life our 
domestic animals grazed on wild or native grasses. Feeding 
them upon cultivated grasses and grains will be discussed under 
Agriculture. 

Grazing on our western frontier. From the earliest settle- 
ments in the territory now occupied by the United States, 
grazing has been an important industry. Following closely in 
the wake of the hunters, trappers, and fur traders, and in ad- 
vance of the farmers, have gone the herdsmen. The wild grasses 
furnished a ready source of income to the man who possessed 
animals capable of turning them into salable products. The 
frontier settlements in colonial New England possessed large 
herds of cattle, and down to 1820 beef was one of the principal 
exports. Hogs ran wild in the woods, and, living as they did 
on roots and mast, they furnished an abundant supply of meat. 
Horses were exported in considerable numbers. After the 
danger from wolves was reduced, sheep were grown in large 
numbers. In Virginia and the Carolinas grazing developed 
even more rapidly. The cattlemen had their brands registered, 
they organized round-ups, and they carried on the business 
very much as it was carried on in the Far West in the seventies 
and eighties of the last century. 

The herdsmen continued to move westward in advance 
of the more permanent settlements, but the farmers who 
plowed the land and harvested crops kept many animals to 
graze upon the native grasses which still flourished upon the 
unbroken lands. Before the building of the railroads great 
herds of cattle, sheep, and hogs were driven sometimes hundreds 
of miles to market in the cities of the Atlantic coast. A hog 



THE EXTRACTIVE INDUSTRIES 201 

which could not transport itself to market was not of much 
value ; consequently not much attention was given to the breed- 
ing of the short-legged, barrel-shaped hog of the present day. 
The cattle, likewise, were built more for traveling than for 
meat. The oxen of that period, which were preferred to horses 
for heavy farm work, were well adapted to that purpose. 

When the advance waves of settlement reached the great 
prairies of the West, the grazing industry entered a new phase. 
Those natural meadows of vast extent furnished a much more 
abundant pasturage than had the great forest which extended 
almost unbroken from the Atlantic coast to western Ohio in 
the central part of the country, and to the Mississippi River 
and beyond on the north and south. Goats and asses had 
never figured largely among the domestic animals of this coun- 
try, but horses, cattle, sheep, and hogs had multiplied rapidly. 
On these Western prairies, the former home of countless herds 
of buffalo, deer, elk, and antelope, all of which were grazing 
animals, cattle and sheep were very economically produced, 
and would have been enormously profitable had not the prices 
of beef, mutton, and wool fallen so low as barely to cover the 
low cost of production. Dwellers in Eastern cities enjoyed 
abnormally cheap meat and continued to do so until the very 
end of the nineteenth century ; since that time meat prices 
have been gradually approaching a normal level again. 

The Texas cattle trail. After the close of the Civil War 
the grazing industry entered still another phase. Vast herds of 
cattle, brought by the early Spanish settlers, had long roamed 
the plains of Mexico and Texas. After Texas entered the 
United States, the grazing industry developed rapidly under 
the energetic management of American cattlemen. Texas cattle 
began to enter the markets of the North and East. The Civil 
War put a stop to this for a time. At the close of the war the 
Texas ranges were swarming with cattle. They soon began to 
move northward in search of more pasture as well as of better 
markets. This drift northward followed, in the main, the western 



202 



PRINCIPLES OF POLITICAL ECONOMY 



edge of the settlements, and the route came to be known as 
the Texas Cattle Trail. As settlements extended westward the 
trail necessarily moved westward also. 

By this time the northern ranges were all west of the 
Mississippi River and were soon confined to the Great Plains. 
Farming on these plains was slow in development, because of 
the insufficient rainfall. Therefore the tide of westward settle- 
ment was so retarded as to permit a considerable develop- 
ment of what came to be called cattle ranching. The grazing 



r 


^1^ 






SHEEP 

^EXCLUDING LAMBS) 


EACH DOT RcPI^ESENTS 




/ 


^ 


7c^ 




NUMBER, 1 


910 


6 000 HEAD 


fk^ 


r I "^ 


1 


-' 


") I 




\ / yf_ 


Sh. -X — 


\.';-'.'^ 


c 


>~j 


\ V 


i-— 




r^r 


^^^V 


■^h 




\1 


\ ' 


/ 


~T~L 


-r-I-_ 


I" '^-s 


rM 


y^0r^^ 


r 


T 


\ 


/ ** 


\ 


n v-w \ 


x^hTr^ 




\ ^ 


\ 


\ 


\-~—-A 


\ 


1 


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'^zi^-^^'^'^ 






\ 


-^ 


\ 


^■ii 


ffi; 












H^ 


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"■■ 


■^' ,- 


^ .. ;. 



Distribution of Sheep in the United States 

industry was given more time in which to develop systematically. 
It was less transitory than it had been on the rapidly moving 
frontier of earlier times. It still survives over considerable 
areas of the arid West, that is, west of the one hundred and 
second meridian, though it is gradually becoming more restricted 
through the gradual settlement of the better lands by farmers. 
Nearly half the beef cattle and more than half the sheep 
of the United States are grown on these ranges, though many 
of the animals raised there are afterwards fattened in what 
is known as the corn belt; that is, the country in which 



THE EXTRACTIVE INDUSTRIES 



203 



Indian corn is the leading crop. This belt extends from Ohio 
westward beyond the Missouri River, roughly to the ninety- 
eighth meridian. Considerable numbers of horses are also 
grown on these ranges, but most of them are grown on the 
farms farther east. Goats also have increased on some of the 
southwestern ranges, though they have never played a very 
important role in our national economy. 

Lumbering. Next to grass the most valuable natural product 
of the soil is timber. It might occupy first place if the value of 




Distribution of Cattle in the United States 

the native timber standing at a given time were compared with 
the value of the native grass standing at the same time. The 
proper basis of comparison, however, is the annual growth of 
the two products on soil equally good for either. Though this 
is sometimes called the age of steel, wood is still an important 
and almost indispensable material. 

The first settlers on our Atlantic seaboard found a dense 
and apparently limitless forest extending from the coast west- 
ward. It was not until well into the nineteenth century that 
the advance guard of the army of western migration began to 



204 PRINCIPLES OF POLITICAL ECONOMY 

emerge from this forest onto the great prairies of the West. 
Timber was so abundant as scarcely to be considered an 
economic good. Certainly the settlers had little occasion to 
economize it. The best of it they used rather lavishly ; the rest 
they destroyed in order that they might use the land for things 
which they needed more than they needed timber. Along the 
northern tier of states the great forest extended as far west as 
Minnesota. In the middle strip the prairies began in parts of 
northern Indiana. Farther south the forest followed the Ohio 
valley to the Mississippi, and extended beyond through central 
and southern Missouri, Arkansas, and Louisiana into portions of 
eastern Kansas, Oklahoma, and Texas. Other forests were found 
in the high mountains of the West, but the finest of all were 
found in the region of Puget Sound in our extreme Northwest. 
After the first onslaught of the settlers, who were bent on 
getting rid of the timber in order to clear the land for cultiva- 
tion, lumbering became a regular business in every part of our 
forested area. Its greatest development was in lands which 
were not the most valuable for agricultural purposes. Along 
our northern border, where the climate was somewhat severe, 
and where the soil was rather light and sandy, the timber was 
not destroyed in order to clear the land, because better lands 
were available farther south. When the timber of this northern 
strip came to have a commercial value, it became the scene of 
lumbering on a large scale. Large companies were formed, 
thousands of men were employed, and great fortunes were 
made. Lumbering in this region, particularly along the Great 
Lakes and the upper tributaries of the Mississippi River, that 
is, in the states of Michigan, Wisconsin, and Minnesota, where 
water transportation was cheap, developed rapidly during the 
latter half of the nineteenth century and then declined rapidly. 
A . similar development took place in the southern states. 
Here the greatest activity was along the southern coast, just out- 
side of the cotton belt ; that is, on land which was not cleared 
primarily for the purpose of growing cotton, but where the 



THE EXTRACTIVE INDUSTRIES 



205 



timber was left standing until it had acquired a commercial value 
through the increased demand and the improvement of trans- 
portation facilities. The most valuable timber tree of this belt was 
the yellow pine, as the white pine had been of the northern belt. 

Lumbering, however, has by no means been confined to 
these two belts. Much timber of various kinds and qualities 
is cut every year in every state in the Union, though naturally 
it is less in the prairie states than in the states which were 
originally forested. In the older states some of the timber 
lands have been cut over several times since the first settle- 
ment and will doubtless yield many harvests in the future. 
But the greater part of our original virgin forest has been 
destroyed. Such cut-over lands as are not suitable for other 
purposes, or not needed immediately for agriculture, will un- 
doubtedly be allowed to reforest themselves or be reforested 
by scientific methods, but it is safe to say that the days of 
cheap and abundant timber in this country are past. From this 
time forward careful conservation will be necessary in order to 
safeguard an adequate supply. 

The magnitude of the lumber industry of the United States 
for the years 1899-19 13 is shown by the following table : ^ 

NUMBER OF ACTIVE MILLS REPORTING AND QUANTITY OF 
LUMBER, 1899-1913 





Number of 


Lumber 




Number of 


Lumber 


Year 


Active Mills 


(Quantity 


Year 


Active Mills 


(Quantity 




REPORTING 


M Feet b.m.) 




reporting 


M Feet b.m.) 


I913 


21,6682 


38,387,009 


1908 


3i'23i 


33,224,369 


1912 


29,648 


39.158414 


1907 


28,850 


40,256,154 


I911 


28,107 


37,003,207 


1906 


22,393 


37>55o>736 


1910 


3i>934 


40,018,282 


1904 


18,277 


34,135,139 


1909 


48,112 


44,509,761 


1899 


31,833 


35,084,166 



1 Bulletin No. 232, United States Department of Agriculture. Washington, 

1915- 

2 In 191 3 the number of active mills included only those cutting lumber, 
while the figures for the other years include mills cutting laths and shingles as 
well as lumber. 



2o6 PRINCIPLES OF POLITICAL ECONOMY 

In addition, much timber is cut for local use on farms, both 
for firewood and for mechanical purposes. 

Mining, The greatest of all our extractive industries is 
mining. Within the boundaries of the United States is found 
a wealth and variety of minerals such as no other country is 
known to possess, though no one knows what new discoveries 
may yet be made in this and other lands. 

Notable among our mineral products are the following. 
The values given are for the year 191 5. 

r Bituminous 1502,037,688 

\ Anthracite 184,653,498 

fOre 101,288,084 

tPig 401,409,604 

Copper .... 242,902,000 

Petroleum 179,462,890 

Natural gas .'.... 101,312,381 

Gold 101,035,700 

Silver, lead, zinc, aluminum, cement, building stone, lime, 
and salt are also valuable products, besides many others of less 
value. Our total mineral production for the year 191 5 aggre- 
gated more than two and a third billions of dollars. 

Since minerals are not reproduced or replaced when once 
extracted from the earth, it is only a question of time before 
all of our rich deposits will be exhausted. In some cases the 
deposits are so enormous as to remove the time of their ex- 
haustion so far into the future that it is difficult for us to realize 
that it is coming. Authorities agree that our coal deposits will 
last for many hundreds of years, some say many thousands of 
years. A thousand years seems a long time to an individual, 
but it is not so very long in the life of a nation. If, however, 
we have enough coal to last, let us say, for only a thousand 
years, it is a difficult question to decide to what extent that 
should give us concern for the future welfare of our country. 
It is easy to laugh and say that it need not concern us, for 
we shall not be here to suffer inconvenience. It is also easy 



THE EXTRACTIVE INDUSTRIES 207 

to become too much alarmed ; with the progress of invention 
we may find other sources of heat and power before our coal 
is gone. Probably our best policy is merely to avoid unreason- 
able waste or destruction of mineral resources, and then leave 
future generations to work out their own problems. Wisdom 
will not die with us of the present generation. 

Instability of the extractive industries. All our extractive 
industries have not only added greatly to our material wealth ; 
they have likewise given rise to picturesque but somewhat un- 
stable phases of our social life. The early hunters and trappers 
were a hardy, adventurous race, whose deeds and prowess 
have become a part of our national history. Our herdsmen 
likewise, especially those who developed the cattle business on 
the Great Plains, supplied an element of romance and adven- 
ture which still appeals to the imagination of our people. Our 
hardy fishermen and whalers have given splendid examples of 
the courage and strenuosity which can wrest a living from the 
unconquerable ocean. Our lumber camps and our mining 
camps have attracted adventurous and unstable characters from 
the ends of the earth, and furnished much excellent material 
for the story-writers. But instability is a characteristic of these 
industries, and consequently of the life which grew up around 
them. Stability can only be supplied to our national life by 
industries which are themselves self -perpetuating. The genetic 
industries must supply that need. 



CHAPTER XVII 

THE GENETIC INDUSTRIES 

What are the genetic industries ? By the genetic industries 
are meant those in which men make conscious and systematic 
efforts to direct the biological processes of reproduction so as 
to increase the supply of desirable plants and animals. The 
greatest of these is agriculture, which includes both the cultiva- 
tion of plants and the breeding of animals. Forestry and* fish 
culture are also included under the head of genetic industries. 
Agriculture, however, is sometimes carried on in such a slip- 
shod manner as scarcely to deserve to be classed as a genetic 
industry. When farmers make no effort to preserve the fertility 
of their soil, but exhaust it by wasteful methods of tillage and 
by reckless overcropping, and then move on to new and unex- 
hausted areas, their business is sometimes called mining the 
soil. A genuinely genetic type of agriculture can endure and 
even improve for indefinite periods of time on the same soil ; 
that is, it not only preserves but improves the fertility of the 
soil, generation after generation, for hundreds and thousands 
of years. It thus makes possible a stable, an enduring, and an 
expanding civilization such as could not be supported exclu- 
sively by any of the extractive industries. 

Demand of all outdoor industries for space. All of those 
industries which appropriate or increase the products of the 
soil, such as hunting, grazing, lumbering, forestry, and farm- 
ing, have one characteristic in common. They all require a 
great deal of space as compared with mining and the second- 
ary industries, such as manufacturing and merchandizing. So 
great is this demand for space on the part of those industries 
which gather in or develop the products of the soil, that those 

208 



THE GENETIC INDUSTRIES 209 

who engage in them must of necessity spread themselves over 
wide areas in proportion to their population. They are com- 
pelled by the nature of their industries to live in scattered 
homes or in small villages located far apart. They are there- 
fore called ''rural," that is, ''field," or "open space," indus- 
tries, and those who engage in them are called " rural," "field," 
and " open space " people. Living so far apart, with plenty of 
room, in close contact with nature but in little contact with 
other men because of the distances between them, produces 
a profound reaction upon their lives and characters. Perhaps 
it would be more accurate to say that those who engage in the 
indoor industries are so cramped for space, and have so few 
contacts with nature and so many contacts with one another, 
that a profound and artificial change is produced in their lives. 
By the indoor industries are meant all those which, in contrast 
to the field industries, require so little space that they can be 
walled in and roofed over. It is sometimes difficult for indoor 
and outdoor people to understand one another. 

We have seen in the last chapter that the utilization of the 
soil, not only on our own frontier but also in the development 
of civilized life among our remote ancestors, passed through 
several distinct stages, such as the hunting stage, the grazing 
stage, and the agricultural stage. These are progressive stages 
in the economizing of space. It takes a great deal more terri- 
tory to support a given population by hunting than by grazing, 
and by grazing than by agriculture. When game grew scarce, 
or when population increased, those who had the wisdom to 
make the change were forced into grazing, and again into 
tillage, in order to increase their means of subsistence. What 
an uneconomical use of land hunting was may be inferred 
from the fact that there were never, according to the best author- 
ities, more than one million Indians within the boundaries 
of the present United States. This territory now supports 
approximately, a hundred times that number of people, and sup- 
ports them more comfortably than the Indians were supported. 



2IO PRINCIPLES OF POLITICAL ECONOMY 

Each Indian tribe was forced to guard its hunting grounds, 
lest they be invaded by hunters from other tribes and the 
source of its subsistence cut off. 

Tillage. Tillage consists essentially of three processes : first, 
preparing a good seed bed, in which plants can grow more 
vigorously than in natural, or unprepared, soil ; second, planting 
in this prepared seed bed the seeds of such plants as are deemed 
most useful or desirable ; and, third, destroying all other plants, 
commonly called weeds, which may start to grow in the seed 
bed in competition with the plants whose seeds were planted. 

Scientific agriculture. While tillage consists essentially of 
these three processes, scientific agriculture includes many things 
besides. We need to be on bur guard, however, against a 
pedantic use of the word scientific as applied to agriculture. 
Scientific agriculture is nothing more nor less than the most 
economical and effective use of all the factors of agricultural 
production. Specifically it consists mainly, though not exclu- 
sively, in economizing, first, the plant food in the soil ; second, 
space ; third, labor ; and, fourth, capital or equipment. Econo- 
mizing plant food means getting as large a product as possible 
without depleting the supply of plant food. Economizing space 
means getting as large a product as possible from a given area ; 
that is, as large a product per acre as possible. Economizing 
labor means getting as large a product per unit of labor, or 
per man, as possible. Economizing capital or equipment means 
getting as large a product per unit of capital or equipment 
as possible. 

Excessive economy of any one of these factors always involves 
a certain amount of waste with respect to some of the others. 
For example, it is quite possible to economize space to such an 
extent as to exhaust plant food, and vice versa. That is to say, 
a farmer may try for a period of years to get so much from 
each acre as eventually to deplete the fertility of his soil. By a 
judicious rotation of crops, and the keeping of live stock, he 
may preserve the fertility of his soil for indefinite periods of 



THE GENETIC INDUSTRIES 21 1 

time, but this may not give him the maximum product per acre 
in the present. If there is one crop that yields better than 
any other, a short-sighted farmer is tempted to grow that 
single crop, since it would give him a larger product per acre ; 
but such continuous cropping tends to exhaust his soil. Rotat- 
ing tends to preserve the fertility of the soil, but gives less per 
acre in the present ; this frequently means growing some crops 
which are not so profitable in the immediate present as the 
main crop. 

The law of diminishing returns. A similar conflict arises 
between the economy of space and the economy of labor. It 
is possible to try to grow so much per acre as to reduce the 
product per man or per unit of labor. It is this phase of the 
question of economy that is commonly known as the law of 
diminishing returns from land. This law is simply that, after 
a certain amount of labor with the appropriate tools has been 
applied to the cultivation of a given crop on a given piece of 
land, further applications of labor do not yield proportional 
returns. They may increase the crop slightly, thus increasing 
the yield per acre, but they will not increase the crop in pro- 
portion as the labor is increased. The result is a decrease in 
proportion to the number of units of labor.^ 

This principle may be illustrated by means of the following 
table, which purports to show how much corn, in a hypo- 
thetical case, could be produced upon a ten-acre field by using 
different quantities of labor and tools, the quantities being 
expressed in terms of days' labor of a man and team with 
appropriate tools. The ratio between the product and the 
labor is shown in the third column, which states the number 
of bushels produced per day's labor. 

On a field such as we have assumed, it would be possible, by 
using fifty days' labor, to get sixty-five bushels per acre, which 
would be more economical of space than to put twenty-five 

1 See the author's chapter on Diminishing Returns in his volume, "The 
Distribution of W^ealth." The Macmillan Company, New York, 19 14. 



212 



PRINCIPLES OF POLITICAL ECONOMY 



days on it and get only forty-five bushels per acre. It would be 
less economical of labor, however, since by using only twenty- 
five days' labor the farmer gets eighteen bushels for each day, 
whereas he gets only thirteen bushels for each day when he 
applies fifty days' labor to its cultivation. Just how to balance 
the two factors, land and labor, so as to get the best results 
from both, is a very nice problem in farm management. If 
labor is cheap and land is dear, it is more important to econo- 
mize space than labor ; but if labor is dear and land is cheap, 
the opposite is better. 





Day's Labor of a 








Man and Team 


Total Yields in 


Bushels per Day's 


Bushels per 


WITH Appropriate 


Bushels 


Labor 


Acre 


Tools 








I 





o"" 







5 


50 


10 


Increasing 


5 


lO 


150 


15 


returns 


15 


15 


270 


18 




27 


20 


380 


19, 




38 


25 


450 


18I 




45 


30 


510 


17 




51 


35 


560 


16 


Diminishing 


56 


40 


600 


15 


returns 


60 


45 


630 


14 




63 


50 


650 


13. 




65 





The great law of productivity. This law of diminishing 
returns has been called the great law of agricultural produc- 
tion. It is a part of a wider law which may be called the law 
of variable proportions, which is the fundamental law of all 
production. This larger law will be discussed in a later chapter 
devoted to that subject.^ For the present it is sufiicient to 
point out that it presents the problem of balancing the different 
factors which have to be combined in production. It is much 
the same problem at bottom, whether it be the balancing of 
the different elements of plant food in fertilizers, the different 



1 See Chapter XXXI. 



THE GENETIC INDUSTRIES 213 

elements of animal food in the feeding of cattle, the balancing 
of such factors as labor, land, and capital in running a farm or 
a factory, or the balancing of the different kinds of people 
that are required to make up a nation. 

The largest industry. Agriculture is not merely one of the 
basic, or primary, industries ; it is the most important of all 
industries, if we consider the world at large or any large section 
of it which is compelled to live within itself. Considerable sec- 
tions of country and considerable masses of population may live 
primarily by the indoor industries, sending out their surplus 
produce to distant lands and bringing back in exchange the 
products of the soil. Thus, a country like England, or con- 
siderable portions of our own country, such as southern New 
England, may become largely urbanized ; that is to say, the 
greater portion of the people may engage in indoor rather than 
in outdoor industries. But they live by selling the products 
of their indoor industries to people far beyond their own 
boundaries, and bringing in from the ends of the earth the 
products of the soil. Even the United States as a whole is 
tending to become an urbanized nation ; that is, it is tending 
toward a condition where more than half of her people will 
work indoors rather than outdoors. Again, there is a tendency 
even in the world at large for the indoor industries to gain 
somewhat in importance as compared with the outdoor indus- 
tries, though it is unlikely that the former will ever actually 
overtake the latter. 

Why agriculture is losing ground. As civilization advances, 
people tend to demand finer and finer products for consump- 
tion. Usually, though not in every case, producing a finer 
product means doing more work in the finer, or finishing, 
stages. It takes no more wool or cotton, and therefore it 
takes no more agricultural labor, to make fine than coarse 
clothing. The difference is mainly in the amount of work 
which is put upon the material after it leaves the farm. In 
other words, of the total work put upon material, a smaller 



214 PRINCIPLES OF POLITICAL ECONOMY 

proportion is outdoor labor, and a larger proportion is indoor 
labor, in the case of fine clothes than in that of coarse clothes. 
The same principle applies to shoes, furniture, vehicles, and 
many articles of food. Throughout the whole civilized world 
this increase in the proportion of labor performed indoors as 
compared with that performed outdoors tends to increase the 
city population more rapidly than the rural population. 

Another and more important fact is the increased use of 
agricultural machinery. Fewer men are now needed in the 
actual cultivation of the land, as some of the work is done in 
the factories where farm machinery is made. Whereas all the 
men who formerly helped in the harvesting of a wheat crop 
actually worked in the field, now some of them work in the 
shops and factories making harvesting machinery, and only 
a part of the total number actually work in the fields. The 
same change has taken place with respect to many other kinds 
of farm work. 

Influence of occupation on character. Of all the leading 
occupations in civilized countries, there is only one in which 
success depends primarily upon the ability to deal efficiently 
with nature and natural forces, — that is, farming. In most of 
the others success depends quite as much on ability to deal 
with other men as on ability to deal with nature. Those whose 
success depends primarily upon the ability to deal with other 
men, whether it be to please, persuade, or amuse them, or to 
wheedle the money out of their pocketbooks, must necessarily 
become expert in those arts of expression and deportment 
which are pleasing to other men. Those, on the other hand, 
whose success depends primarily upon their ability to deal with 
nature must become equally expert in the art of dealing with 
nature, — that is, in handling materials and directing natural 
forces. It is not surprising, therefore, that these two classes 
of experts, having so little in common, should sometimes fail 
to understand and appreciate one another. A farmer, particu- 
larly the old-fashioned, self-sufficing farmer, who had few points 



THE GENETIC INDUSTRIES 215 

of contact with other men but many points of contact with 
nature, would naturally acquire less of what are sometimes 
called the social graces, less adroitness in the amenities of 
polite society, less expertness in indoor etiquette, than one whose 
business or professional success depended upon these forms 
of skill. They who get their living out of the soil must know 
the soil, the weather, the times and seasons, and everything 
that will affect their success, whereas they who get their living 
by dealing with other men must know the ways of men. 

Commercial agriculture. The characteristics which farmers 
of an earlier day developed naturally and almost of necessity 
are becoming less prominent as the nature of agriculture 
changes. Self-sufficing agriculture has become a thing of the 
past, and we are developing what may be called commercial 
agriculture ; that is, a system of agriculture in which the farmer 
is a buyer and seller, a dealer with other men, to almost the 
same extent as a city business man. He must now understand 
not only markets but political and social conditions, even those 
delicate psychological factors upon which successful buying and 
selling depend. This is tending to wipe out whatever distinc- 
tions formerly existed between the dwellers in the city and the 
dwellers in the country. 

The independence and dependence of the farmer. We are 
hearing constantly reiterated, especially by advocates of the 
back-to-the-land movement, that the farmer is the most inde- 
pendent person in the world. The farmer himself does not 
always see it that way. Probably no one is so dependent upon 
outward physical conditions as the farmer. He must continu- 
ally watch the weather and guard against pests of all sorts, animal 
diseases, predatory animals, and even town marauders. Every 
year lightning, hail, wind, and floods destroy crops in some 
part of the country. When the farmer thinks of all his 
troubles, he is very likely to long for the comparative safety and 
independence of the indoor worker. On the other hand, the in- 
door worker is constantly harassed by troubles of human origin, 



2i6 PRINCIPLES OF POLITICAL ECONOMY 

political elections, commercial crises, changes of fashion, the 
organization of predatory trusts and monopolies, labor troubles, 
the type of advertiser who levies something akin to blackmail. 
When he thinks of all his troubles, he is very likely to long for 
the comparative safety and independence of the farmer. 

One important characteristic of agricultural industry is its 
dependence upon the seasons. The indoor worker is frequently 
able to continue uninterruptedly in one kind of work, week after 
week, month after month, and year after year. From the very 
nature of the case this is impossible in agriculture, for every crop 
has its growing season and its time of harvest. On every farm 
almost every hour of the day has its own special work to be 
done, so that work is continually changing, not simply from 
season to season, from month to month, and from week to week, 
but even from hour to hour. This makes agriculture almost of 
necessity an industry of small units. In an indoor industry, 
where a man can be kept at the same job continuously, me- 
chanical or automatic administrative methods and devices may 
be installed, so as to simplify the work of superintendence. It 
is possible, therefore, for a man of very moderate intellect and 
power to run an establishment employing thousands of men. 
To run ten men efficiently on a farm, where each man must be 
assigned a new job frequently on a moment's notice, where the 
whole work of the farm must be reorganized to meet a situa- 
tion brought about by the change in the weather or in the con- 
ditions of some growing crop, requires as great mental ability 
as to run an indoor establishment employing hundreds of men. 
To run a farm employing one hundred men, and run it effi- 
ciently, would require the ability of a great military commander, 
a merchant prince, a captain of industry, or a university presi- 
dent. Very few farming establishments which employ as many 
as one hundred men have ever succeeded or can succeed. 

Country people generally self-employed. Perhaps the most 
important fact concerning agriculture is that a very large 
proportion of those engaged in it are self-employed, whereas 



THE GENETIC INDUSTRIES 217 

the vast majority of those who Hve in cities are employed by 
other people. The fact that farming is an industry of small 
units, while indoor industries are generally industries of large 
units, produces this difference. 

Some of the deepest students of political and social tendencies 
have come to doubt whether democracy can ever develop to 
a high stage of efficiency except among people who are in the 
main self-employed. It is true that modern democracy arose 
first in the cities and towns, but it is likewise true that at that 
time the cities and towns were the homes of self-employed 
men. Before the rise of the factory system such manufacturing 
as was done was carried on in small shops by craftsmen who were 
in the majority of cases self-employed. The rural districts, how- 
ever, were under the feudal system. Conditions are exactly 
reversed at the present time. Under the factory system the 
great majority of people in the indoor industries work under 
bosses. Since the break-up of the feudal system and the rise 
of the one-family farm, which is the characteristic farm in this 
country, the average dweller in the country is his own boss. 
This may have something to do with the fact that city politics 
is run by bosses and country politics is not. 

According to the census of 1850 there was one farm in this 
country for every fourteen persons living under rural conditions ; 
that is, outside of cities of eight thousand inhabitants or more. 
According to the census of 1900 there was one farm for every 
nine persons in rural residence. This shows that, up to 1900 
at any rate, the tendency was toward a larger number of inde- 
pendently operated farms in proportion to the rural population. 
Again, in 1900 there was one farm of fifty acres or more for 
every 13.4 rural dwellers. When we consider that towns and 
villages of eight thousand or less contain a fair proportion of 
those 13.4 people, we shall see that in the open country itself 
there are very few people engaged in work on each farm. They 
are nearly all what are called one-family farms ; that is, farms 
operated mainly by the labor power of one family. 



2i8 PRINCIPLES OF POLITICAL ECONOMY 

Interdependence of the sexes. The division of labor between 
the sexes is much more marked, of course, in agriculture than 
in indoor industries. There are so many operations on every 
farm which require the superior muscularity of the male as 
practically to shut women out. At the same time, the fact that 
the farms are so far apart makes it impossible for these muscu- 
lar males to get along without women to run their houses. The 
men cannot live in boarding houses, because that would make 
it necessary to live too far from their work. Practically every 
farmer has to have a wife to do the indoor work.. This may 
not be the highest motive for marrying, but still it does en- 
courage the marriage habit. Consequently one finds in our 
rural districts fewer old, unmarried males than one finds infest- 
ing our cities and towns. Moreover there are comparatively 
few opportunities for a woman to make an independent living 
in the country, so that she is almost under compulsion to 
marry or else to move to town, where she can get remunera- 
tive employment. 

Forestry. Forestry as distinct from lumbering has only 
recently received attention in this country. The United States 
Timber Culture Act of 1873 was designed to encourage tree 
planting by granting not more than 160 acres of the public 
land free of cost to anyone who would plant a part of it to timber 
trees. At first it was required that one fourth of the land be so 
planted, but the requirement was soon changed to one sixteenth. 
The purpose was obviously to encourage the partial forestation 
of the western prairies, but what nature herself had never been 
able to accomplish was not accomplished by act of Congress. 
As one rides over the western plains one occasionally sees 
small tracts of straggling trees fighting for an existence in land 
which is too dry for them. These are the results of that act 
of Congress. Possibly if the act had been passed earlier, while 
there was public land left in the humid belt, something might 
have been accomplished, but even this is doubtful. Prairie land 
which will grow trees is generally more valuable for other 



THE GENETIC INDUSTRIES 219 

purposes. Even if a settler had, on such land, made trees grow 
successfully, he would probably have found it advantageous to 
cut them down in order to devote the land to some more valu- 
able purpose. 

Forestry economical on waste land. Forestry, in order to be 
an economic success, must obviously be practiced on land which 
would produce a greater value at lower cost when planted to 
trees than when planted to anything else. Mountainous and 
semi-mountainous lands, stony or swampy lands, and lands 
which for other reasons are unsuited to tillage or pasturage 
furnish the natural opportunity for the practice of forestry on 
a large scale. While the annual product in the form of the 
annual timber growth is small, the cost is likewise small. Since 
the land would otherwise go to waste altogether, it is better to 
get even a small product than none at all. 

Scientific forestry. In recent years the federal government 
and several of the states have created forest reserves. Scien- 
tific forestry is being practiced, but it must be remembered that 
scientific forestry in this country is necessarily different from 
what it is in old countries. In a country where lumber is still 
cheap as compared with other countries, though dear as com- 
pared with what it once was, and where labor is dear, as it is in 
this country, one cannot do in the name of science what one 
can do in an old country, where lumber is dear and labor cheap. 
A serious problem for the American forester is to keep costs 
down ; unless he does this he may find that the timber is not 
worth what it costs to grow it. For this reason it is not the 
custom in this country to do much planting of trees or prepa- 
ration of the ground. The work is mainly confined, first, to 
cutting out undesirable growths in order to give the more durable 
growths, which are in the main self-seeded, a chance to grow ; 
and, second, and more important still, to guard against forest 
fires. Our summers, which are dry compared with those of 
Europe, make the forest fire the great enemy of the American 
forester. The fight against diseases and pests is a third task. 



220 PRINCIPLES OF POLITICAL ECONOMY 

Fish culture. Fish culture has been fostered by the federal 
and state governments of the United States and by various 
private agencies. Spawn is collected and hatched, and millions 
of young fish are distributed in our streams and along our 
seacoasts. A great deal of study is being given to the habits 
of various edible fishes and the sources of their food. Private 
enterprise is also active in stocking streams and small bodies 
of water, and in growing fish of various kinds for the market. 

With our Great Lakes on the north, the two oceans on the 
east and west, and the Gulf of Mexico on the south, and with 
all our noble rivers, we have access to such vast and seemingly 
inexhaustible supplies of fish that fish culture in a strict sense 
has not developed very far among us. Hatching and distribut- 
ing spawn, and leaving the spawn to shift for itself and take its 
chances along with other wild fish, is a step in the right di- 
rection, but it stops far short of the work of the animal breeders 
on our farms. 



CHAPTER XVIII 

THE MANUFACTURING INDUSTRIES 

Various types of manufacturing establishments. When we 
think of a manufacturing industry nowadays, we are very likely 
to form a picture of a huge building or group of buildings, 
dominated by a tall chimney and filled with roaring machinery 
and busy men and women. Such is, indeed, the typical factory, 
though much manufacturing is still done in small shops where 
a few men work with small and comparatively simple tools. 
In the large factory the tools and the raw material, as well as 
the buildings, engines, etc., are usually owned by one man or 
group of men, while the work is done by another group. In 
smaller establishments various combinations are found. One 
kind of manufacturing establishment which is still numerous 
and widely distributed is the small shop where the worker owns 
his own tools and equipment, buys his own raw materials, and 
sells the finished product. It does not constitute much of a 
change, certainly not a revolution, when he hires a few helpers 
or apprentices to assist him. They work with his tools upon 
his raw materials, and they receive their compensation in the 
form of wages instead of in the form of a share of the profits 
of the business. Even where the owner ceases to do any of 
the work except to keep the accounts, buy the raw materials and 
sell the products, and exercise general supervision and manage- 
ment, the transition may have been so gradual as to attract no 
one's attention. By this gradual change, however, a type of 
manufactory may be developed which is very different from 
that with which it started. 

But the transition is not always made in this way. Other 
methods of organization have existed at various times, and still 



222 PRINCIPLES OF POLITICAL ECONOMY 

exist. In one class of shops the worker owns his own tools 
and runs his own shop, but does not own the raw materials 
upon which he works. These are furnished by an outside 
person who supplies them and owns the finished product, 
paying the worker a price agreed upon for the work which he 
does. In this case also the worker may hire a few helpers or 
apprentices. 

Still another method is found where the worker owns neither 
the materials upon which nor the tools with which he works. 
A third person supplies both materials and tools, — everything, 
in fact, except the place in which the work is done. This the 
laborer himself supplies. 

In the modern factory, however, everything is assembled in 
one building or group of buildings, around one power plant ; 
everything is owned by one group of individuals, and the 
laborer furnishes nothing except his own skill and strength. 
The great advantage of this system is its economical use of 
power. Wherever a large use of power is necessary, it is im- 
portant that it be effectively and economically utilized. In all 
such cases the factory, in this modern sense, tends to displace 
all other methods of manufacturing. Where comparatively 
little power is required, and where, therefore, it is not of such 
great importance that it be economized, other methods still 
survive. In some cases, however, the competition of the factory 
is so severe as to force the workers in the small shops to 
work for very low wages. Where the main factor in success 
is the skill of the worker rather than cheap power, the small 
shop will probably continue to compete successfully with 
the factory. 

There has been a general tendency, however, for the large 
factory to grow and the small shop to decline in importance. 

Progress toward large-scale production. The stages of this 
development from the small shop to the factory are by no 
means clear. Almost every form of manufacturing will be 
found in every stage of economic development. The large 



THE MANUFACTURING INDUSTRIES 223 

factory has come to be the dominant form only since the 
invention of power-driven machinery. The industrial revolu- 
tion, as it is called, was the rather sudden growth of the 
factory to this dominant position during the latter half of the 
eighteenth century. 

Power-driven machinery and large-scale production. A re- 
markable series of inventions followed one another in rapid 
succession and transformed several of the large industries of 
England into factory industries. These changes put England 
definitely in the lead as a manufacturing nation. The same 
revolution came in other countries a little later. Says Marshall : ^ 

The quarter of a century beginning with 1 760 saw improvements follow 
one another in manufacture even more rapidly than in agriculture. During 
that period the transport of heavy goods was cheapened by Brindley's 
canals, the production of power by Watt's steam engine, and that of iron 
by Cort's processes of puddling and rolling and by Roebuck's method of 
smelting it by coal in lieu of the charcoal that had become scarce ; Hargreaves, 
Crompton, Arkwright, Cartwright, and others invented, or at least made 
economically serviceable, the spinning jenny, the mule, the carding machine, 
and the power loom ; Wedgwood gave a great impetus to the pottery trade 
that was already growing rapidly ; and there were important inventions in 
printing from cylinders, in bleaching by chemical agents, and in other proc- 
esses. A cotton factory was for the first time driven direcdy by steam 
power in i yS^, the last year of the period. The beginning of the nineteenth 
century saw steamships and steam printing presses, and the use of gas for 
lighting towns. Railway locomotives, telegraphy, and photography came a 
little later. Our own age has seen numberless improvements and new 
economies in production, prominent among which are those relating to the 
production of steel, the telephone, the electric light, and the gas engine ; and 
the social changes arising from material progress are in some respects more 
rapid than ever. But the groundwork of the changes that have happened 
since 1785 was chiefly laid in the inventions of the years 1760 to 1785. 

The inventions which preceded the cotton factory. A more 
detailed account is given in Walpole's '' History of England 
from 1815 "2; 

1 Alfred Marshall, Principles of Economics, 4th ed., p. 42. London, 1898. 

2 Quoted from Bullock's " Selected Readings in Economics," pp. 128-143. 
Ginn and Company, Boston, 1907. 



224 PRINCIPLES OF POLITICAL ECONOMY 

In the middle of the eighteenth century, then, a piece of cotton cloth, in 
the true sense of the term, had never been made in England. The so-called 
cotton goods were all made in the cottages of the weavers. The yarn was 
carded by hand ; it was spun by hand ; it was worked into cloth by a hand 
loom. The weaver was usually the head of the family ; his wife and un- 
married daughters spun the yarn for him. Spinning was the ordinary 
occupation of every girl, and the distaff was, for countless centuries, the 
ordinary occupation of every woman. The occupation was so universal 
that the distaff was occasionally used as a synonym for " woman." " Le 
royaume de France ne tombe point en quenouille. "... To this day every 
unmarried girl is commonly described as a spinster. 

The operation of weaving was, however, much more rapid than that of 
spinning. The weaver consumed more weft than his own family could 
supply him with ; and the weavers generally experienced the greatest 
difficulty in obtaining sufficient yarn. 

THE FLY SHUTTLE 

About the middle of the eighteenth century the ingenuity of two persons, 
a father and a son, made this difference more apparent. The shuttle had 
originally been thrown by the hand from one end of the loom to the other. 
John Kay, a native of Bury, by his invention of the fly shuttle, saved the 
weaver from this labor. ... By means of these inventions the productive 
power of each weaver was doubled. Each weaver was easily able to per- 
form the amount of work which had previously required two men to do, 
and the spinsters found themselves more hopelessly distanced than ever 
in their efforts to supply the weavers with weft. . . . 

HARGREAVES'S SPINNING JENNY 

The trade was in this humble and primitive state when a series of extraor- 
dinary and unparalleled inventions revolutionized the conditions under 
which cotton had been hitherto prepared. A little more than a century 
ago ( 1 764-1767) James Hargreaves, a poor weaver in the neighborhood of 
Blackburn, was returning home from a long walk, in which he had been 
purchasing a further supply of yarn for his loom. As he entered his cottage 
his wife, Jenny, accidentally upset the spindle which she was using. 
Hargreaves noticed that the spindles, which were now thrown into an upright 
position, continued to revolve, and that the thread was still spinning in his 
wife's hand. The idea immediately occurred to him that it would be possi- 
ble to connect a considerable number of upright spindles with one wheel, 
and thus multiply the productive power of each spinster. He contrived a 
frame in one part of which he placed eight rovings in a row, and in another 
part a row of eight spindles. . . . His ignorant neighbors hastily concluded 



THE MANUFACTURING INDUSTRIES 225 

that a machine which enabled one spinster to do the work of eight would 
throw multitudes of persons out of employment. A mob broke into his 
house and destroyed his machine. Hargreaves himself had to retire to 
Nottingham, where, with the friendly assistance of another person, he was 
able to take out a patent for the spinning jenny, as the machine, in compli- 
ment to his industrious wife, was called. 

ARKWRIGHT'S WATER FRAME 

The invention of the spinning jenny gave a new impulse to the cotton 
manufacture. But the invention oi the spinning jenny, if it had been ac- 
companied by no other improvements, would not have allowed any purely 
cotton goods to be manufactured in England. The yarn spun by the jenny, 
like that which had previously been spun by hand, was neither fine enough 
nor hard enough to be employed as warp, and linen or woolen threads had 
consequently to be used for this purpose. In the very year, however, 
(1769) in which Hargreaves moved from Blackburn to Nottingham, 
Richard Arkwright took out a patent for his still more celebrated machine. 
. . . The principle of Arkwright's great invention is very simple. He 
passed the thread over two pairs of rollers, one of which was made to 
revolve much more rapidly than the other. The thread, after passing over 
the pair revolving slowly, was drawn into the requisite tenuity by the 
rollers revolving at a higher rapidity. By this simple but memorable inven- 
tion Arkwright succeeded in producing thread capable of employment as 
warp. From the circumstance that the mill at which his machinery was 
first erected was driven by water power, the machine received the some- 
what inappropriate name of the water frame ; the thread spun by it was 
usually called the water twist. 

PAUL'S CARDING MACHINE 

The invention of the fly shuttle by John Kay had enabled the weavers 
to consume more cotton than the spinsters had been able to provide ; the 
invention of the spinning jenny and the water frame would have been use- 
less if the old system of hand carding had not been superseded by a more 
efficient and more rapid process. Just as Arkwright applied rotatory motion 
to spinning, so Lewis Paul introduced revolving cylinders for carding cotton. 
Paul's machine consisted of " a horizontal cylinder, covered in its whole cir- 
cumference with parallel rows of cards with intervening spaces, and turned 
by a handle. Under the cylinder was a concave frame lined internally with 
cards exactly fitting the lower half of the cylinder, so that when the handle 
was turned the cards of the cylinder and of the concave frame worked 
against each other and carded the wool." " The cardings were of course 
only of the length of the cylinder, but an ingenious apparatus was attached 



226 PRINCIPLES OF POLITICAL ECONOMY 

for making them into a perpetual carding. Each length was placed on a 
flat, broad riband, which was extended between two short cylinders, and 
which wound upon one cylinder as it unwound from the other." 

CROMPTON'S MULE 

This extraordinary series of inventions placed an almost unlimited sup- 
ply of yarn at the disposal of the weaver. But the machinery, which had 
been thus introduced, was still incapable of providing yarn fit for the finer 
qualities of cotton cloth. " The water frame spun twist for warps, but it 
could not be advantageously used for the finer qualities, as thread of great 
tenuity has not strength to bear the pull of the rollers when winding itself 
on the bobbin." This defect, however, was removed by the ingenuity of 
Samuel Crompton, a young weaver residing near Bolton. Crompton suc- 
ceeded (i 774-1 779) in combining in one machine the various excellences of 
" Arkwright's water frame and Hargreaves's jenny." Like the former, his 
machine, which from its nature is happily called the mule, " has a system 
of rollers to reduce the roving ; and, like the latter, it has spindles without 
bobbins to give the twist, and the thread is stretched and spun at the same 
time by the spindles after the rollers have ceased to give out the rove. " 

Before Crompton's time it was thought impossible to spin 
eighty hanks to the pound ; the mule has spun three hundred 
and fifty hanks to the pound ! The natives of India could spin 
a pound of cotton into a thread one hundred and nineteen miles 
long ; the English succeeded in spinning the same thread to 
a length of one hundred and sixty miles. Yarn of the finest 
quality was at once at the disposal of the weaver, and an 
opportunity was afforded for the production of an indefinite 
quantity of cotton yarn. But the great inventions which have 
thus been enumerated would not of themselves have been 
sufficient to establish the cotton manufacture on its present 
basis. The ingenuity of Hargreaves, Arkwright, and Cromp- 
ton had been exercised to provide the weaver with yarn. 
Their inventions had provided him with more yarn than he 
could by any possibility use. The spinster had beaten the 
weaver just as the weaver had previously beaten the spinster, 
and the manufacture of cotton seemed likely to stand still 
because yarn could not be woven more rapidly than an expert 
workman with Kay's improved fly shuttle could weave it. 



THE MANUFACTURING INDUSTRIES 227 

CARTWRIGHT'S POWER LOOM 

Such a result was actually contemplated by some of the leading manu- 
facturers, and such a result might possibly have temporarily occurred if it 
had not been averted by the ingenuity of a Kentish clergyman. Edmund 
Cartwright, a clergyman residing in Kent, happened to be staying at 
Matlock in the summer of 1 784, and to be thrown into the company of 
some Manchester gentlemen. The conversation turned on Arkwright's 
machinery, and " one of the company observed that as soon as Arkwright's 
patent expired so many mills would be erected and so much cotton spun 
that hands would never be found to weave it." Cartwright replied " that 
Arkwright must then set his wits to work to invent a weaving mill." The 
Manchester gentlemen, however, unanimously agreed that the thing was 
impracticable. Cartwright " controverted the impracticability by remarking 
that there had been exhibited an automaton figure which played at chess." 
It could not be '' more difficult to construct a machine that shall weave than 
one which shall make all the variety of moves which are required in that 
complicated game." Within three years he had himself proved that the 
invention was practicable by producing the power loom. Subsequent inven- 
tors improved the idea which Cartwright had originated, and within fifty 
years from the date of his memorable visit to Matlock there were not less 
than one hundred thousand power looms at work in Great Britain 
alone. . . . 

Such are the leading inventions which made Great Britain in less than 
a century the wealthiest country in the world. . . . 

THE STEAM ENGINE OF NEWCOMEN AND WATT 

Steam was actually used early in the eighteenth century as a motive power 
for pumping water from mines ; and Newcomen, a blacksmith in Dartmouth, 
invented a tolerably efficient steam engine. It was not, however, till 1 769, 
that James Watt, a native of Greenock, and a mathematical-instrument 
maker in Glasgow, obtained his first patent for " methods of lessening the 
consumption of steam, and consequently of fuel, in fire engines." James 
Watt was born in 1736. His father was a magistrate, and had the good 
sense to encourage the good turn for mechanics which his son displayed 
at a very early age. At the age of nineteen Watt was placed with a 
mathematical-instrument maker in London, but feeble health, which had 
interfered with his studies as a boy, prevented him from pursuing his 
avocations in England. Watt returned to his native country. The Glasgow 
body of Arts and Trades, however, refused to allow him to exercise his 
calling within the limits of their jurisdiction ; and had it not been for the 
University of Glasgow, which befriended him in his difficulty and appointed 



228 PRINCIPLES OF POLITICAL ECONOMY 

him their mathematical-instrument maker, the career of one of the greatest 
geniuses whom Great Britain has produced would have been stinted at 
its outset. 

There happened to be in the university a model of Newcomen's engine. 
It happened, too, that the model was defectively constructed. Watt, in the 
ordinary course of his business, was asked to remedy its defects, and he 
soon succeeded in doing so. But his examination of the model convinced 
him of serious faults in the original. Newcomen had injected cold water 
into the cylinder in order to condense the steam and thus obtain a neces- 
sary vacuum for the piston to work in. Watt discovered that three fourths 
of the fuel which the engine consumed was required to reheat the cylinder. 
" It occurred to him that, if the condensation could be performed in a sepa- 
rate vessel, communicating with the cylinder, the latter could be kept hot, 
while the former was cooled, and the vapor arising from the injected water 
could also be prevented from impairing the vacuum. The communication 
could easily be effected by a tube, and the water could be pumped out. 
This is the first and the grand invention by which he at once saved three 
fourths of the fuel and increased the power one fourth, thus making every 
pound of coal produce five times the force formerly obtained from it." 
But Watt was not satisfied with this single improvement. He introduced 
steam above as well as below the piston, and thus again increased the 
power of the machine. He discovered the principle of parallel motion, and 
thus made the piston move in a true straight line. He regulated the supply 
of water to the boiler by the means of " floats," the supply of steam to the 
cylinder by the application of " the governor," and, by the addition of all 
these discoveries, " satisfied himself that he had almost created a new engine 
of incalculable power, universal application, and inestimable value. "... 

The steam engine, indeed, would not have been invented in the eighteenth 
century, or would not at any rate have been discovered in this country, if 
it had not been for the vast mineral wealth with which Great Britain has 
fortunately been provided. . . . 

DUDLEY'S METHOD OF SMELTING IRON WITH COAL 

At the commencement of the seventeenth century Dud Dudley . . . had 
proved the feasibility of smelting iron with coal ; but the prejudice and 
ignorance of the work people had prevented the adoption of his invention. 
In the middle of the eighteenth century, attention was again drawn to his 
process, and the possibility of substituting coal for wood was conclusively 
established at the Darby's works at Coalbrook Dale. The impetus which 
was thus given to the iron trade was extraordinary. The total produce of 
the country amounted at the time to only 18,000 tons of -iron a year, four 



THE MANUFACTURING INDUSTRIES 229 

fifths of the iron used being imported from Sweden. In 1802 Great Britain 
possessed 1 68 blast furnaces, and produced 1 70,000 tons of iron annually. 
In 1806 the produce had risen to 250,000 tons; it had increased in 1820 
to 400,000 tons. Fifty years afterwards, or in 1870, 6,000,000 tons of iron 
were produced from British ores. 

The progress of the iron trade indicated, of course, a corresponding 
development of the supply of coal. Coal had been used in England for 
domestic purposes from very early periods. Sea coal had been brought to 
London; but the citizens had complained that the smoke was injurious 
to their health, and had persuaded the legislature to forbid the use of coal 
on sanitary grounds. The convenience of the new fuel triumphed, however, 
over the arguments of the sanitarians and the prohibitions of the legisla- 
ture, and coal continued to be brought in constandy though slowly increas- 
ing quantities to London. Its use for smelting iron led to new contrivances 
for insuring its economical production. 

Decay of small industries. Scarcely less striking would be 
an account of the rise of machine production in other indus- 
tries, following the use of steam power and cheap iron and 
steel. Shoe manufacturing, the grinding of flour, the slaughter- 
ing of meat animals and the curing and packing of meat, the 
manufacture of watches, automobiles, etc., and various other 
industries have shown the same tendency toward the factory 
system of production. Regarding changes in our own country. 
Professor Ely writes : ^ 

Let the reader call to mind the many things in our economic life which 
the world never saw before. He will, of course, think at once of the rail- 
way and of steam navigation, and of other applications of steam to industry. 
But these have brought other important new phenomena. The concentra- 
tion of large masses of working-people in great factories of which they own 
no part, and under a single employer, such as we see daily, is something 
new for skilled mechanics ; not that nothing of the kind ever existed be- 
fore, but its existence is so much more common and affects so many more 
people that in its social aspects it is new. In the last century, and in previous 
centuries of the Middle Ages, artisans owned the tools which they used, 
and after they had fully mastered their trades usually called no man 
master, but worked in their own little shops. Even within the memory 
of the author, still comparatively a young man, this condition of things 

1 Richard T. Ely, An Introduction to Political Economy, pp. 55-57. New 
York Chautauqua Press, 1889. 



230 PRINCIPLES OF POLITICAL ECONOMY 

has become less common. The smith, under the spreading tree, of whom 
Longfellow sang, is disappearing. He has left the cross-roads in the little 
village and now works in a machine shop. His friends, the carpenter and 
the shoemaker, have accompanied him. A few artisans may stay to do 
repairing and other small work, but the cheaper processes of vast establish- 
ments have rendered this migration inevitable for the many. Only the few 
among artisans can live in the old style. 

CONCENTRATION IN LARGE CITIES 

Houses are constructed in large establishments and they are sent to small 
places where it is only necessary to put them together. Merchants have 
also been obliged to leave the villages where they were owners of inde- 
pendent establishments to seek employment in immense city retail and 
wholesale shops, because the railroad has carried their customers away 
from them. 

The amount of production increases continually, but the number of sepa- 
rate establishments where production is carried on decreases uninterruptedly. 
Milling serves as a good illustration. " The completion of the great mills 
has caused the abandonment and decay of hundreds of the picturesque, old- 
fashioned neighborhood mills. In 1 870, according to the census of that year, 
there were in the entire country 22,573 grist mills, 58,448 hands, represent- 
ing $151,500,000 of capital, and making a product worth $444,900,000. 
In 1880 the number of establishments was 24,338, the number of hands 
58,407, the capital invested $177,300,000, and the value of the product 
was $505,100,000 (the price of flour had declined ten per cent in this 
decade). The increase shown in the number of establishments ... is more 
apparent than real, the great bulk of flour having been made in a decidedly 
smaller number of mills in 1880 than in 1870. Since 1880 the blighting 
effect of the great merchant mills upon the small establishments has become 
visible to every one. According to the Miller's Directory for 1884, . . . 
there were at that time some 22,940 mills in the country, a decline of 1,398 
from the census figures of 1880. . . . From 1884 to 1886 . . . the number 
of milling establishments has decKned to 16,856 ... a loss in two years of 
more than twenty-six per cent." ^ The number of mills in the South has 
declined more rapidly than elsewhere. In 1880, in North Carolina, 13 13 
mills employed only 1844 men, but in the same state there were only 632 
mills in 1886. It is said^that the number of mills in the country is destined 
to become very much smaller still. Readers can readily gather from census 
and trade reports many similar illustrations of this concentration of busi- 
ness, which is one of the main causes of the existence of present problems. 

1 Albert Shaw in the Chautauqtian for October, 1887. 



THE MANUFACTURING INDUSTRIES 231 

Tendency of mechanically expert nations toward indoor 
industries. Large portions of the world's population still remain 
in a condition of mechanical inexpertness. They find it more 
advantageous to live from the products of the soil, exchanging 
these products for the manufactured products of the mechani- 
cally expert nations. Other populations, like those of our own 
West, while mechanically expert, occupy land of such abun- 
dance and fertility that they find it more profitable to cultivate 
land than to turn to the indoor industries. They use their me- 
chanical expertness in contriving and operating farm machinery. 
They exchange their large surplus of farm products for the 
manufactured products of other people who are mechanically 
expert and who occupy lands of less extent and lower fertility. 
The latter, not having vast areas to cultivate, find less profit- 
able opportunities for their mechanical expertness out of doors 
than indoors. Therefore they develop the indoor industries. 
England, who got a good start ahead of the rest of the world in 
this line of development, prospered amazingly. The eastern part 
of the United States, together with France, Belgium, Holland, 
and lately Germany, have been following in the same direction. 
As this tendency increases, the competition among the indoor 
industries is likely to become so intense as to reduce the profits 
and drive a certain percentage of the people back to the farms. 

Taking the United States as a whole, it is rapidly ceasing 
to be primarily an agricultural country and is becoming a manu- 
facturing country, following a similar development in England 
and northwestern Europe. Canada, South America, Australia, 
South Africa, and all countries where white men colonize will 
doubtless follow in the same direction. There will then be left 
only the tropics in which to sell the surplus products of manu- 
facture and from which to draw the surplus products of the 
soil. It is probable that the development of the indoor indus- 
tries will be checked before that state is reached. In that case 
each country will have to preserve a balance, or equilibrium, 
between the indoor and the outdoor industries. 



232 PRINCIPLES OF POLITICAL ECONOMY 

As pointed out in the chapter on the Genetic Industries, the 
advance in civihzation, and the general improvement of Hving 
conditions, tends to add to the relative importance of the indoor 
as compared with the outdoor industries. The finer the goods 
we demand, the more work we make, generally speaking, for 
the indoor workers. Even farm work itself comes, in a sense, 
to be done indoors rather than outdoors. The substitution of 
the tractor for the horse may serve to illustrate this statement. 
The raising of horses is outdoor work ; the manufacturing of 
tractors is indoor work. If we use more tractors and fewer 
horses, a larger proportion of our workers will work indoors 
and a smaller proportion outdoors. 

This is a process which must be expected to continue even 
though we remain a self-sufficing nation. If we cease to be a 
self-sufficing nation, bringing raw materials and products of the 
soil from distant portions of the earth, and sending in exchange 
the more refined products of the indoor industries, we must 
expect that manufacturing will become in larger and larger 
degree our dominant occupation. 



CHAPTER XIX 

TRANSPORTATION 

Moving things over long distances. Since all industry con- 
sists in moving materials from one place to another, it follows 
as a matter of course that transportation must form an important 
part of the industrial system. That which we call transportation 
differs, however, from other kinds of work in that it consists 
in moving materials over long distances, — distances which are 
measured in miles rather than in inches, feet, or yards. The 
transportation system has been likened to the veins and arteries 
of the physiological organism, just as the telegraph and tele- 
phone systems have been likened to the nerves. 

The development of the factory system as described in the 
preceding chapter, and of large-scale production in general, 
would have been impossible without cheap transportation. 

The railway and the factory have gone hand in hand in their develop- 
ment and in their economic results. With the means of transportation which 
existed two hundred years ago large industries would have been impossible. 
The substitution of turnpikes for common roads, of canals for turnpikes, 
and of railways for canals was as essential a part of industrial progress as 
was the development of the factory system.^ 

Without a wide market on which to sell its large product a 
large factory or manufacturing establishment would be an impos- 
sibility. In the days of restricted local markets, when each little 
community was almost self-sufficing, small shops having indi- 
vidual handicraftsmen could supply the needs of each such 
unit. Not the least important of the changes which have come 
about since the middle of the eighteenth century has been the 

1 President A. T. Hadley, ^' Transportation," in Palgrave's Dictionary of 
Political Economy. 

233 



234 PRINCIPLES OF POLITICAL ECONOMY 

battering down of the walls which divided one restricted market 
from another, and the creation of nation-wide or world-wide 
markets instead of a series of local, restricted markets. 

The widening of the market. Cheap transportation, more 
than anything else, has made possible the development of nation- 
wide and world-wide markets. Raw materials sometimes have 
to be brought long distances, especially in a case where several 
different kinds of raw material enter into the making of a given 
product. These different kinds of raw material are not always 
found in close juxtaposition. The iron ore of the Lake Superior 
region would be practically useless, because of its distance from 
the coal fields, were it not for cheap transportation on the Great 
Lakes, by means of which it can be carried almost to the mouths 
of the coal mines of Illinois, Indiana, Ohio, and Pennsylvania. 

In other cases the raw material itself is produced over such 
wide areas as to make centralized and large-scale production an 
impossiblity without cheap transportation. The slaughtering of 
meat animals and the curing and packing of the meat is a case 
in point. These animals must be grown on the farms and 
ranges over considerable areas. Without cheap transportation 
they would have to be slaughtered and consumed nearer the 
sources of production ; with cheap transportation they may be 
sent to a few large packing centers, and from these centers the 
meat can be distributed over practically the whole country and 
over considerable portions of the civilized world. Without cheap 
transportation every large city would be dependant upon the 
supply of meat that could be grown within driving distance, that 
is, within such distances as the animals could travel on foot. 
They would have to be slaughtered near each center of con- 
sumption in order that the meat might be distributed economi-. 
cally. Without cheap transportation the cotton industry of New 
England could never have developed to such proportions as it 
has. The raw material is all produced hundreds of miles, and 
most of it thousands of miles, away from the factories. The 
manufactured product, in turn, is distributed over the entire 



TRANSPORTATION 235 

country and considerable portions of the civilized world. Every 
description of the industrial revolution in England gives great 
attention to the cotton and woolen industries, for it was in these 
industries that the transition was most striking. And perhaps 
the most striking feature was the long distances over which the 
raw material had to be transported and the wide markets in 
which the finished product could then be sold. Before the 
development of the railways, water transportation was the only 
cheap form ; and England was peculiarly well situated with 
respect to ocean transportation. 

However great the economies of large-scale production may 
be, if the cost of transportation were as great as it once was, 
the small producer, using locally-produced raw materials and 
selling on a local market, would save so much on the cost of 
transportation as to give him an advantage over the biggest 
factory located a long distance away. The cheaper transporta- 
tion becomes, the less the saving of transportation costs will 
figure as an advantage in industry. Every industry will then 
tend to be located in the place where other advantages are 
greatest. When freight costs one cent per ton per mile, one can 
readily see that one could ship a suit of clothes weighing, say ten 
pounds, a long distance without adding perceptibly to the cost 
of the suit. The freight for a thousand miles would be only five 
cents. If it cost twenty-five cents per ton per mile, distance 
would be a very large factor in the location of a clothing industry. 

Water transportation developed first. Historically, water 
transportation was cheapened long before we had cheap land 
transportation. Consequently we find that commerce in a large 
sense developed first on the water. 'Great cities were located 
where there were advantages in water transportation. Con- 
siderable commerce has always been carried on, from the very 
earliest times, by means of caravans traveling over land, but the 
cost of this kind of transportation was so great that the com- 
merce which developed under these conditions was necessarily 
confined to articles of luxury which embodied large value 



236 PRINCIPLES OF POLITICAL ECONOMY 

in small bulk. ''The wealth of the Indies," as that term 
was used in Europe, consisted of silks, gold and silver and 
precious stones, and a few rare delicacies for the very rich. 
Some considerable cities, however, developed along these over- 
land routes. Damascus and Palmyra in western Asia, Troyes 
and Nuremberg in Europe, may be cited as examples. But the 
great cities developed along water routes ; Canton, Hankow, 
Calcutta, Delhi, Nineveh, Babylon, Bagdad, Tyre, Constanti- 
nople, Memphis, Alexandria, Venice, Genoa, Antwerp, and 
London may be cited as examples. 

Water transportation developed first, of course, where it was 
safe ; that is, on rivers or small bodies of inclosed water. The 
great rivers were the first great routes for cheap transportation. 
The valleys of the Nile, the Euphrates, the Tigris, the Ganges, 
and the Yangtze developed great civilizations, partly because 
they contained good soil and opportunities for irrigation, but 
also because they furnished means of transportation. 

The keel and the compass. The next stage was reached 
when the sailors ventured beyond the mouths of the rivers 
along the adjacent coasts and in inclosed seas like the ^gean, 
the Mediterranean, and the Baltic. The difficulty of navigation 
in those days was such as to make an ocean voyage extremely 
hazardous, if at all possible. The boats of those early days 
were flat-bottomed, that is, they had no keels ; it was therefore 
impossible to sail in the teeth of the wind. Sails could be used 
only when the wind was favorable ; that is, when it blew almost 
in the direction in which the sailors wanted to go. At other 
times they had to depend upon large numbers of oars worked 
by human muscles. The galley slave was a part of that system of 
transportation. There is some dispute as to the origin of the keel, 
but whenever or wherever it was invented, it must be regarded as 
one of the great inventions of history, for it enabled the sailor 
to sail almost into the teeth of the wind and, by skillful tacking, 
to go anywhere he wanted to, regardless of the direction of the 
wind. A little later the mariner's compass came into use, by 



TRANSPORTATION 237 

means of which the sailor could venture out of sight of land 
and still keep his bearings and reach his destination. 

With these two inventions in their possession, sailors could 
now leave not only the rivers but the inclosed seas, and venture 
away from the seacoasts and traverse the broad, uncharted 
ocean. Columbus never would have dared to venture on his 
quest of an ocean route to India without these two inventions. 

The world faces on the ocean. As a result of the discoveries 
of Columbus, Vasco da Gama, and others the world was said 
to have faced about. The various nations had formerly faced 
inward, with their backs to the ocean ; the land united peoples, 
but the ocean divided them. Since that time they have tended 
to face outward, that is, to face the ocean ; and it is now said 
that the land divides, but the ocean unites. While distances are 
great over these ocean routes, the building of larger ships 
propelled either by steam or by wind has made ocean transpor- 
tation the cheapest of all forms. Where time is not a factor, 
the huge sailing vessels can carry freight thousands of miles 
cheaper than it can be carried hundreds of miles even on our 
best railways. Where time is a factor, the cost is slightly 
greater, but still ocean freight rates are amazingly low. The 
question of economizing power and that of economizing time 
seem sometimes to come into conflict. The sailing vessel is the 
greatest economizer of power, but it is not economical of time. 

The order of development of water transportation has been 
described as, first, the potamic stage ; second, the thalassic ; 
and, third, the oceanic. The following outline indicates roughly 
the general types of transportation now in use. 

r Potamic 

' Water J Thalassic 

Oceanic ^ ,^ 

^ I Man power 

Transportation <; f ^^^^s, roads, and streets -j Animal power 

Land ^ Railways i Mechanical power 

[ Tramways 
L Air 



238 PRINCIPLES OF POLITICAL ECONOMY 

The most primitive trade routes were probably paths traversed 
by human beings carrying their own loads. Beasts of burden 
were, however, utilized very early for this purpose. The ac- 
counts of early explorers in Central Africa describe the great 
forest as penetrated by a network of paths running from one 
village to another, so that a traveler could cross the continent 
by persistently following these paths. The great caravan routes 
mentioned above, across the desert and open country, made 
use of animals as beasts of burden. 

Wheels. A wheeled vehicle is a great advance over the 
carrying of loads on the backs either of men or of animals. In 
some of the backward districts of China, porters still carry huge 
loads, and it is amazing what loads a man can carry who has 
been trained to it all his life. But where the road is made 
suitable for wheeled vehicles, the porter can haul about three 
times as much on wheels as he can carry. On a paved street 
or a macadamized road in this country a pair of good horses 
will haul from two to four tons, whereas about six hundred 
pounds is a load for a pack horse. Even on the common dirt 
roads of the country, when they are reasonably well kept and 
not muddy, a pair of horses will haul from a ton and a half 
to two tons. 

Most people use roads and streets more than they use rail- 
roads, though it is difficult to say that one is more important 
than the other. They are all so interlocked and interdependent 
that it is hard to treat them separately. For short distances we 
must of course depend upon roads and streets, using the rail- 
roads for transportation over long distances and the hauling 
of heavier loads. 

Animal power. On the roads and streets man power is still 
used, as suggested above, in some backward countries. It is 
cheap only when labor is very cheap. A man can live on much 
less grain than is required to feed a horse. If a man is willing 
to live largely on a grain diet, it will hardly pay him to keep a 
horse where grain is very scarce. Where the population is so 



TRANSPORTATION 239 

dense that it is necessary to conserve every ounce of food, and 
men are reduced to the barest necessities of Hfe, it is uneco- 
nomical to use animal power except for heavy loads which are 
too great for human muscles. Where there is land enough to 
provide food not only for human beings but for animals, the 
use of animal power becomes economical, because much more 
work can be done, more land cultivated, more goods trans- 
ported, and thus the animals can be fed and still leave more 
to supply human needs than would otherwise be produced. 

Mechanical power. There is a tendency at the present time 
to substitute mechanical power for animal power even on the 
roads and streets. . The development of the automobile and the 
auto truck is opening up great possibilities in this direction. It 
is not probable, however, that mechanical power will entirely 
displace animal power, any more than animal power could 
entirely displace human power. The tendency in our civilized 
communities is for the use of human power for transportation 
purposes to be confined to shorter and shorter distances ; carry- 
ing goods from the grocer's delivery wagon to the kitchen door, 
carrying coal from the curbstone to the cellar, moving goods 
within warehouses, etc., will probably continue to be done by 
human muscles for some time to come. A similar development 
will probably take place with respect to animal power. For long 
distances and the carrying of heavy loads the auto truck will 
probably prove increasingly economical, but for short distances 
the horse is still and will probably continue for some time to be 
more economical. The economy of the auto truck, however, de- 
pends upon the character of the roads. With the common dirt 
roads which formerly prevailed in the country it is doubtful if it 
could have been used economically even if it had been developed. 

Better tracks. It is interesting to note how every advance 
in methods of transportation seems to depend upon the quality 
of the road or track. Wheeled vehicles could only be substi- 
tuted for pack saddles when there were roads suitable for 
wheeled vehicles. Well-kept roads and paved streets are 



240 PRINCIPLES OF POLITICAL ECONOMY 

necessary before mechanical power can be substituted for animal 
power in ordinary hauling. The acme of track building is the 
railway, where the wheeled vehicle runs on steel rails. The 
friction and loss of power between the wheel and the track is 
reduced to the minimum. In a similar way the modern loco- 
motive is the climax of the development of mechanical power. 
Thus the improvement in mechanical devices goes hand in 
hand with the improvement in road or track. Ever since the 
first building of railways and the use of locomotive engines 
this development has proceeded hand in hand. The first loco- 
motives were small and crude affairs as compared with the 
magnificent engines which now haul our freight and passenger 
trains. The magnificent engines of to-day, however, could 
scarcely run on the old-fashioned railway track, with its light 
iron rails. Improvement in the manufacture of the steel rail 
has had to go hand in hand with the improvement of the 
locomotive engine. 

Railways. It may seem strange to young people to be told 
that there are men now living who can remember when there 
were no railways. Such men, of course, are now somewhat rare, 
but the fact remains that the present age of the railway does 
not exceed the span of a reasonably long human life. The 
railway mileage of the world has increased by leaps and bounds. 
In no country has the development of the railway kept pace 
with its development in the United States, though in propor- 
tion to their need for railway transportation England and Ger-^ 
many have kept close behind us. Our area is so vast, and our 
people have been spreading so rapidly over this vast area, that 
a great demand for transportation facilities has been created. 
In addition we have had an abundance of material for their 
construction. Moreover, our people have shown a great deal 
of initiative and enterprise in pushing the business. In some 
countries this spirit of enterprise has been so lacking that the 
governments themselves have had to take hold of the matter 
and build the roads at government expense. 



TRANSPORTATION 241 

Public or private railways. The problem of railway man- 
agement, however, has been a very difficult one in every coun- 
try. In one sense the railway system would seem to belong 
to the general system of streets, roads, and highways. The 
general experience of mankind has shown that streets, roads, 
and highways should be public rather than private. This has 
led to the assumption that railways should be treated similarly. 
There is, however, this important difference. On the streets, 
roads, and highways private individuals use their own vehicles, 
travel freely, and go and come when they please. The actual 
work of transportation, therefore, is not carried on by the public. 
This method would be impossible on a railway. The trains must 
run on schedule time and under a well-administered system ; 
otherwise there would be nothing but confusion and ineffi- 
ciency and multitudinous wrecks. If the public undertakes to 
own the railways, it would have to go much farther than it does 
when it owns the streets and highways. It would either have 
to operate all the vehicles (that is, trains) or lease the road to 
a single company which would have the exclusive use of the 
tracks. Obviously even two independent individuals or com- 
panies could not operate trains on the same track. There are 
therefore two analogies which may be drawn between the high- 
way system and the railway system. Since the government 
owns the highways, one group of people, reasoning by analogy, 
say that the government ought to own the railways. On the 
other hand, it is asserted that since private individuals operate 
the vehicles that are used on the highways, and the govern- 
ment is not in the transportation business at all, a similar rule 
should prevail with respect to railway transportation ; private 
individuals or companies should do the hauling, and therefore 
own the railway. In this country we have followed the latter 
principle, but it has made necessary a considerable regulation 
of the companies which do the hauling. A third possibility is 
that the government should build and own the tracks and then 
lease them to operating companies. 



242 PRINCIPLES OF POLITICAL ECONOMY i: 

Monopolistic character of a railway. From the very nature 
of the case a railway must be operated as a monopoly or quasi- 
monoply. As suggested above, it would be impossible for even 
two companies to run trains on the same track or over the 
same railway system, unless one became absolutely subject to 
the administrative rules of the other. This quasi-monopolistic 
character of the railway has given the management more control 
over rates than individual draymen, freighters, cabmen, etc. can • 
exercise over freight and passenger rates in the vehicles that 
are operated on public highways. In order to hold in check 
this quasi-monopolistic power of the railway, a great deal of 
legislation has been enacted in this country, beginning with 
the granger laws of the seventies and eighties of the last cen- 
tury and culminating in the Interstate Commerce Act of 1887 
and the subsequent development of the powers of the Interstate 
Commerce Commission. This commission now has power to 
prescribe rates and to exercise general control and supervision 
over the administration of all the railways of the country. 

Short- and long-distance hauling. In several countries, such 
as Germany, Switzerland, Australia, and others, the opposite 
alternative has been chosen. The government has built and 
continues to operate the railways. In Germany it was primarily 
a military enterprise ; in order that she might build up her mili- 
tary power and be able to concentrate vast armies and supply 
them at any point, she needed a well-articulated railway system. 
In this respect her policy resembled that of the Romans, who 
were great road builders in their day. Their system of roads 
enabled them to march their armies rapidly from one part of 
the Empire to another, to concentrate wherever concentration 
was needed, and thus to outmaneuver their enemies. 

As to the effects of the two systems on peaceful commerce, 
there are many different opinions. In some respects freight 
rates are more favorable in Germany than in the United States ; 
in others they are much more favorable in the United States. No 
railway system in the world cornpares with that of the United 



TRANSPORTATION 243 

States in the cheapness and swiftness of long-distance freight. 
Our railways, however, have given comparatively little attention 
to local freight. In the efficiency and cheapness with which 
local freight is handled, they are far behind the railroads not 
only of Germany, where the government owns and operates the 
roads, but also of England, where they are operated by private 
companies. The difference is probably not, therefore, to be 
accounted for on the ground of public or private ownership. In 
a densely populated country, where the distances are never very 
great, it would be quite natural that short-distance, or local, 
freight should form a large part of the business of the railroad ; 
whereas in a country of such vast expanse as ours it would be 
equally natural that long-distance freight should form the chief 
part of the railroad business. Each railway system, therefore, 
tends to specialize in that field where its chief business lies. 

Arguments against both sides. No final conclusion is possi- 
ble as to the relative merits of public and private management. 
As Sir Roger de Coverley was in the habit of saying, '' Much 
might be said on both sides." Each side has its partisans, and 
each partisan seems peculiarly unable to appreciate the weak- 
nesses of his own side and the strong points on the opposite 
side. In reading these arguments one gets the impression that 
there is very little to be said in favor of either, but much 
that can be said against both. The arguments against private 
ownership and operation are based mainly on the monopolistic 
character of the railroad business, the rapacity of railroad man- 
agers, and the general distrust of '' big business." The argu- 
ments against public ownership and operation are based mainly 
upon the inefficiency of public business, the danger that politics 
rather than business needs will determine rates and other details 
of the business, and the general distrust of the politician. 

These considerations might very properly convince one that 
the same system is not necessarily the best for all countries. 
In a country which is dominated by autocratic and military 
standards, where business is contemptuously spoken of as 



244 PRINCIPLES OF POLITICAL ECONOMY 

'' shopkeeping," where government service attracts a better 
class of men than business attracts, and where men are chosen 
for high positions not because of their talkativeness or popu- 
larity, but because of their knowledge and efficiency, the objec- 
tions to public ownership and operation are weak and those 
against private ownership and operation are weighty. In a 
country, however, which is dominated by democratic ideals, 
where business and all honest occupations have always been 
regarded as just as honorable as government or military service, 
where, on the whole, business attracts a better class of men 
than politics, and where men are chosen for high public posi- 
tions mainly on the ground of their ability to make stump 
speeches rather than on the ground of their knowledge and 
efficiency, the objections to government ownership and opera- 
tion are very strong, and those against private ownership and 
operation are relatively weak. There is a strong probability, 
however, that the persuasive talkers will be able to enlarge their 
powers, at the expense of the efficient doers, by persuading the 
voters to intrust more and more power to them, the talkers. 



CHAPTER XX 

MERCHANDISING 

Personal utility. In a previous chapter it was pointed out 
that three kinds of utiHty are produced by human industry, — 
form UtiHty, place utility, and time utility. It would be possible, 
if one cared to draw somewhat finer distinctions, to speak of 
personal utility as a special phase of place utility ; or, on the 
other hand, personal utility could be named as a fourth kind. 
When an object is transferred from a person who has no use 
for it to a person who has a use for it, its utility, or power to 
satisfy desires, is increased by the transfer, just as truly as 
though it were transferred from a locality where it is not 
needed to a locality where it is needed. 

There is an ancient fallacy to the effect that someone must 
gain and someone must lose in every trade. This fallacy has 
been exploded so often that it hardly seems necessary to 
repeat the process here. Two farmers may trade horses and 
both gain. A wool grower who has a surplus of wool and a 
shoemaker who has a surplus of shoes may exchange products 
to the advantage of both. A boy who has a surplus of mar- 
bles but a deficit of taffy might advantageously exchange 
some of his surplus marbles for taffy, carrying on the exchange 
with another boy who had a surplus of taffy but a deficit of 
marbles. By this process the personal utility of both marbles 
and taffy would be increased. 

Merchandising may be productive of utility. If it is agreed 
that the power of goods to satisfy wants is increased when 
those goods get into the possession of the people who really 
need them, it ought not to be difficult to see that the individual 

245 



246 PRINCIPLES OF POLITICAL ECONOMY 

who facilitates this process is a productive individual ; that is, 
his work results in increased utility. Even if we leave trans- 
portation and the storing of goods out of account for the 
present, and merely consider the transfer of goods from 
one person to another in the same locality, we shall find that 
unless there were merchants or mercantile houses the various 
producers would find difficulty in making the necessary ex- 
changes. The farmer with a surplus of wheat might have 
some difficulty in finding a shoemaker who wanted wheat and 
was willing to exchange shoes for wheat. Under a highly 
developed mercantile system a farmer can always find buyers 
for his wheat. He can also find a shoe store where he can buy 
shoes, a clothing store where he can buy clothing, and so on. 

These men who specialize in the mercantile pursuits are 
sometimes called middlemen, and it is not difficult to see that 
they are not only exceedingly useful but in some cases abso- 
lutely necessary. It may sometimes happen that too many 
middlemen intervene between the producer and the consumer ^ 
but some middlemen are absolutely necessary unless the pro- 
ducer will undertake to peddle his products around among 
consumers, or unless the consumers will undertake to search 
for producers who have for sale exactly what they, the con- 
sumers, desire to purchase. An immense amount of time and 
trouble is saved when every producer can sell directly to a 
middleman and go on about his work of production, while at 
the same time every consumer can purchase exactly what he 
wants from some merchant. 

The middleman as a timesaver. Generally speaking, it will 
be observed that in any community where the average person 
considers his time to be valuable, there are a great many mid- 
dlemen intervening between producers and consumers, and very 
little direct marketing. In a community, how^ever, where wages 
and incomes are low and the average person finds his time to 
be of very little value, comparatively few middlemen intervene 
between producer and consumer, and there is a great deal of 



MERCHANDISING 247 

direct bartering between producer and consumer. The open 
market place, where producers and consumers meet, flourishes 
in communities of the latter type but not in communities of 
the former type. 

There is an old adage that time is money. Where time is 
valuable, it is economized ; where it is of little value, it is not 
economized. Where the average householder considers her 
time valuable, she does not care to spend much time market- 
ing and dickering with producers who bring their stuff to 
market. She prefers to market by telephone. This is a great 
saving of time, but it is generally expensive in terms of money. 
She is literally paying somebody else to do for her that which 
she might do for herself if she cared to go to market and 
deal directly with the producers. Similarly, where the pro- 
ducer considers his time valuable, he would prefer to sell his 
product in bulk to some middleman rather than to spend 
his time dickering with consumers and selling his product in 
small lots. This system of direct marketing saves money, it is 
true, but it wastes time ; the system of indirect marketing saves 
time but, in a sense, wastes money. The problem in economy 
which every producer and every consumer must decide for 
himself is whether his time is worth as much as the money 
which he might otherwise save. 

The peasant women of certain overcrowded countries, who 
are unable to do farm work and have very little else in the 
way of remunerative work which they can do, find going to 
market a means of saving money. They can sell directly 
to the consumers and cut out middlemen's costs and profits. 
Since they consider their time as worth practically nothing, 
every penny which they can save in this way adds so much to 
the family income. The American farmer, with a somewhat 
higher standard of living, and the farmer's wife, who considers 
her time as worth something, if not for earning money by 
remunerative work, at least for housekeeping or self-cultivation, 
refuses to spend her time in this way. Therefore it is very 



248 PRINCIPLES OF POLITICAL ECONOMY 

difficult in this country to maintain a system of direct market- 
ing. It is the behef, however, of many students of the problem 
that the Americans have gone too far in the direction of 
saving time, — so far, in fact, as to waste more money than 
necessary in middlemen's costs and profits. 

Marketing sometimes a social function. Another factor 
enters into the success of public markets, where producer and 
consumer meet. In those countries where the system still 
prevails, going to market has become a social function. The 
market place is the place where citizens meet and where the 
women make their social calls and pay their social obligations. 
This phase of the question, has played a very important part 
in history. The Roman P'orum, for example, was simply the 
market place, in which the farmers from the surrounding 
country and the people of the city of Rome met, primarily for 
purposes of exchange and secondarily for purposes of social 
intercourse and political discussion. The latter functions gradu- 
ally displaced the former, and the Roman Forum gradually 
became the center of Roman politics and eventually the center 
of the world. The Olympic games, which were for many 
centuries the center of Greek life, developed in connection 
with a fair which was held for the exchange of products. 
While the Greek people were busy with their exchanges 
the young men took part in athletic and intellectual contests ; 
eventually these contests became the chief feature, and the 
mercantile function almost disappeared from sight. 

The social function of going to market has been revived in 
a number of ways in recent times. Great department stores, 
in order to attract trade, especially that of ladies who have 
time for social diversion, have introduced the paraphernalia of 
the drawing-room, with pink teas and other accessories. They 
are deliberately striving to make afternoon shopping a social 
diversion, thus restoring, in the field of the marketing of frills, 
some of the features which originally developed in connection 
with the marketing of the necessaries of life. 



MERCHANDISING 249 

Buying large quantities and selling in small parcels. 

Another very important function performed by the mercantile 
house is that of receiving products in large quantities, such as 
are convenient for the producer to sell, and dividing them up 
into small parcels, such as are convenient for the consumer to 
buy. This breaking up into small parcels is a work of utility ; 
it meets the convenience of both producer and consumer. 
The convenience of the producer is met by his ability to sell 
in bulk ; the convenience of the consumer is met by his ability 
to buy in small parcels. This may, without doing violence to 
our language, be called a kind of form utility. The goods are 
bought in one form and sold in another. There is a certain 
analogy between this process of breaking goods up into small 
parcels and the process of manufacturing, in which the forms 
of goods are changed in other ways. 

Storing goods. One of the most important functions of the 
mercantile class, however, is that of storing goods. In fact, 
it is still customary to speak of certain mercantile houses as 
stores. The storing of goods, of course, produces time utility. 
They are kept from a point in time when they are not espe- 
cially needed until a time when they are especially needed. 
Their utility is thus increased. This function of storing goods 
is particularly important in the case of goods which are pro- 
duced by a seasonal industry, such as agriculture. The wheat 
is harvested during one period of the year, but needs to be 
consumed during the entire year. Unless someone were ready 
to store this product, it would have to be used very inefficiently 
at one period of the year, and there would be a scarcity at 
another period. 

Utility of storing without monopolizing. Contrary to a cer- 
tain popular belief, the effect of storing vast quantities of farm 
products in warehouses is beneficial rather than otherwise. 
No speculator or warehouse owner would have any motive for 
storing products except that of getting a higher price later on. 
He could not get a higher price later on unless the goods 



250 PRINCIPLES OF POLITICAL ECONOMY 

were scarcer later on. If they are scarcer later on, it is very 
much to the interest of society that they be stored rather than 
consumed at once. At the present time, May, 19 17, when 
prices are very high anyway, and it is found that a great deal 
of grain is being stored up, there naturally develops a certain 
popular dissatisfaction. Being shortsighted, we do not appre- 
ciate what is likely to be our situation several months hence. 
The only thing we see is that prices are now distressingly 
high. We see this in connection with another fact, namely, 
that large quantities of wheat are being stored. We think, 
naturally enough, that if that wheat were taken out of storage 
and sold at once, prices would not be so high at the present 
moment. If, however, we were a little more farsighted, we 
should look ahead and consider what the situation would be, 
say in July of the present year. If wheat is going to be more 
abundant then than now, the price will fall. If that were the 
expectation, nobody would be willing to store a single bushel 
of wheat until that time. Everybody would want to sell his 
wheat very soon. If those who are in a position to judge be- 
lieve that wheat will be scarcer in July than in May, and the 
price therefore higher, they find it to their interest to store up 
these products and hold them. If they are correct in their 
anticipation, it is also very important for society at large that 
they, or somebody, should store up wheat ; otherwise we should 
consume wastefuUy this month and go hungry later on. It 
ought not to take very much forethought or reasoning power 
to understand this. It is, however, a sad commentary on the 
shortsightedness of many of our people, and even of men in 
high political positions, that this is so imperfectly understood 
and that we are so generally resentful toward those who are 
performing this important function of storing. 

Another fact which should be taken into consideration is 
that, formerly, large numbers of people, both producers and 
consumers, did their own storing, whereas at the present time 
that work is turned over to a special group of men who own 



MERCHANDISING 2 5 1 

elevators, cold-storage warehouses, and other storage facilities. 
In a less highly organized state of society many farmers 
stored grain in their own bins, and potatoes, fruit, and vege- 
tables in their own cellars. At the same time many con- 
sumers bought supplies in advance and stored them in their 
own cellars. At the present time comparatively few farmers 
hold their products, finding it cheaper to sell them as soon as 
produced than to build and maintain their own storehouses 
and run their own risk of loss or deterioration of the prod- 
ucts. Moreover, consumers have generally got out of the 
habit of buying supplies in advance and keeping them stored 
until needed, finding it cheaper to order supplies as they 
are needed, depending upon other people to do the storing. 
While both producer and consumer are turning this work over 
to a special class, they must not forget that the only motive 
which this special class has for doing this special work is the 
hope of a profit. If they can make a profit and still furnish 
the service cheaper than producers and consumers can furnish 
it for themselves, they have earned their profit. 

Cornering, or monopolizing, is destructive of utility. We 
should be careful, however, to distinguish between storing for 
sale on a competitive market and monopolizing for sale on 
what is known as a cornered market. If there were collusion 
among all those who own warehouses or who are in a position 
to store products, — an agreement to control the supply and fix 
prices artificially, — there would be a real grievance, and the 
individuals who are guilty of such a practice should of course 
be very severely dealt with. But if we can once satisfy our- 
selves that there is no collusion or attempt at monopolization, 
that the products are being stored for sale on a competitive 
market, we can rest perfectly easy in our minds, because no 
one could make any money by storing in this way unless it 
were genuine social service to do so. By social service, of 
course, we do not mean philanthropic service, but merely 
useful work. 



252 PRINCIPLES OF POLITICAL ECONOMY 

Standardization. Another very important function performed 
by the mercantile class is what is known as the classification 
or standardization of goods. The producer of farm products 
especially cannot produce goods of uniform kind and quality. 
On every apple tree there will be apples of various grades, and 
in every large orchard likewise. In every poultry yard there 
will be fowls of different qualities. The consumer who tried to 
purchase directly from the farm might not find exactly the 
grade or quality which he desired. When the farmer sells his 
products in bulk, the middleman will frequently classify or 
grade them into a large number of grades. Take such a simple 
product, for example, as broilers. It is very difficult for one 
poultryman to produce a large number of broilers all of the 
same size, weight, quality, and general condition. A hotel or 
restaurant, however, wishes to treat all customers alike. It does 
not wish to buy broilers in a nondescript, or ungraded, mass. If 
it did so, one customer would get one kind of dish and another 
customer another kind, varying in size and quality. This would 
produce dissatisfaction. A dealer buys broilers from a large 
number of poultrymen and classifies them very minutely. 
There are said to be over one hundred different grades and 
classes. Each hotel and restaurant, and every private con- 
sumer, can get from such a dealer exactly what he wants. 
Multitudes of other illustrations could be given, but enough 
has been said to show that merchandising is a very important 
factor in the economy of human energy and the promotion of 
national prosperity. 

Deception always destruction. It is quite certain, however, 
that certain practices will grow up in connection with mer- 
chandising which are reprehensible. The ancient Greeks re- 
garded Hermes, or Mercury, not only as the herald of the 
gods but also as the god of boundaries, markets, and weights and 
measures, and as the special patron of merchants, gamblers, 
and thieves. There is probably no other branch of human in- 
dustry or business which lends itself so easily to deception and 



I 



MERCHANDISING 253 

adulteration, and which furnishes such temptations to high- 
pressure advertising and salesmanship. The old adage that 
honesty is the best policy is doubtless appreciated by merchants 
of the better class, but unfortunately there are always a good 
many men who are doing some kind of merchandising, to whom 
this adage seems more theoretical than practical. The arts of per- 
suasion are developed to a high degree of proficiency, and pass 
easily over into the arts of deception. The justification given 
is generally summed up in the words, " business is business." 
It is not necessary to present any arguments to show that de- 
ception contributes nothing to national prosperity. What one 
gains by deception, someone else necessarily loses. It is prob- 
ably this phase of the question that has led to the hasty con- 
clusion, which is far too widely accepted, that somebody always 
loses in a trade. That general conclusion was combated at the 
beginning of this chapter. In so far as trading takes the form 
of deception, however, the conclusion is entirely justified. 

Advertising. Advertising occupies a prominent place among 
the forms in which the art of persuasion is carried to a high 
state of development in modern times. To what extent adver- 
tising is economically justified has been a difficult question 
and must remain so. Advertising is sometimes educational. 
The individual sometimes learns from advertisements where 
he can get something which he really wants and has wanted 
for a long time. Without the advertisement he might have 
found difficulty in getting it. This applies, however, mainly to 
new products that have recently been put upon the market. 
One scarcely needs an advertisement to tell one of the exist- 
ence of soap or codfish, or to acquaint one with the fact that 
such things are to be purchased at stores. In many cases of 
this kind the only effect of advertising is to persuade the con- 
sumer to use one man's product rather than another's. One 
producer realizes that if he does not advertise, consumers may 
buy the other man's product. The other man is then com- 
pelled to advertise in order to defend himself against the first 



254 PRINCIPLES OF POLITICAL ECONOMY 

advertiser, and thus it becomes a race, or contest, to get the 
customer's trade, and no addition whatever is made to the 
national wealth or to the well-being of society. It is not 
improbable that eventually the public will exercise its authority 
and use its power of compulsion to limit or redirect the adver- 
tising business. This, however, would be a somewhat dangerous 
experiment, because such public authority would have to be 
exercised by public officers. The worst forms of advertising 
are not found among merchants but among candidates for 
public office. The man who has succeeded in getting elected 
to office by campaigning, which is a kind of advertising, is 
not necessarily the best man to decide upon what is good and 
what is bad advertising either in political campaigning or in 
merchandising. 



* 



CHAPTER XXI 

PERSONAL AND PROFESSIONAL SERVICE 

Causing productivity in others. Falstaff said, '' I am not 
only witty in myself, but the cause that wit is in other men." 
There are many men and women in every community who are 
not directly producing wealth, but who are the cause of pro- 
ductivity in others. The teacher who trains students in the 
productive arts is, to say the least, a cause of productivity, and 
becomes a contributor to national prosperity. The singer, the 
poet, and the artist who inspire to strenuous action and noble 
deeds likewise contribute their share to the greatness of the 
nation. The military band is a part of the fighting strength of 
the army, even though its members never handle a destructive 
weapon of any kind. 

The teacher, the preacher, the musician, the poet, and the 
artist, however, sometimes forget their function in a great 
nation and at times seem almost to imagine that they are the 
objects for which the nation exists. At any rate they have 
been known to go so far as to resent the idea that they have a 
purpose beyond that of contributing to knowledge for its own 
sake or art for its own sake. 

The social function of art, religion, etc. Quite different was 
the attitude of a great French artist when he found his country 
in the throes of the life-and-death struggle which began with 
the invasion of 19 14. Speaking before a gathering of French 
artists, he said that in that crisis no art would be tolerated 
'' which was not noble, robust, proud, and an inciter of high 
thoughts and delicate sentiments — an art of heroic joy." 
Facing the future, he continued : " You would not tolerate any- 
thing less to-day. Then why should you tolerate anything less 

255 



256 PRINCIPLES OF POLITICAL ECONOMY 

hereafter, in that to-morrow when our duties shall be changed ? " 
Here was a full acceptance of the view that art has an end 
beyond itself and is not its own excuse for being. 

Government. The officers of the government who preserve 
order and protect lives and property contribute a large share 
to national prosperity. An army, whose business may seem to 
be destruction rather than production, by protecting against 
invasion from without and insurrection and disorder from 
within may be an indispensable factor in prosperity. 

It is of course possible to have too many so-called non- 
producers, not only in the army but in public offices of 
different kinds, as well as in the various talking and ornamen- 
tal professions. The work of the soldier, for example, is one of 
the most honorable of all professions so long as national 
defense is necessary ; but even the professional soldier himself 
will generally agree that it would be an excellent thing if war 
could be eliminated and the work of the soldier made unneces- 
sary. The same reasoning may be applied to many other 
occupations. No work is more beneficent and honorable than 
that of the physician ; but every physician, if he is worthy 
of the name, is working for the elimination or prevention of 
disease. If it were possible to carry this work to completion, 
it would greatly reduce the need for physicians. Litigation 
among the citizens of the nation is, so far as it goes, almost 
as wasteful as war between nations. If it could be eliminated, 
it would greatly reduce the demand for lawyers. An army of 
very able and talented men would thus be released for other 
kinds of work for which the need persists. The best lawyers, 
like the soldiers and physicians, frankly recognize this and are 
willing to work to reduce the amount of litigation. 

Productive and unproductive labor. Economists have gener- 
ally recognized a distinction between productive and unproduc- 
tive labor, but they have not always agreed as to the line of 
division. Adam Smith ^ wrote : 

1 The Wealth of Nations, Vol. I, pp. 332-334. Clarendon Press, Oxford, 1880. 



PERSONAL AND PROFESSIONAL SERVICE 257 

There is one sort of labor which adds to the value of the subject upon 
which it is bestowed : there is another which has no such effect. The for- 
mer, as it produces a value, may be called productive ; the latter, unproduc- 
tive labor. Thus the labor of a manufacturer adds, generally, to the value 
of the materials which he works upon, that of his own maintenance, and of 
his master's profit. The labor of a menial servant, on the contrary, adds to 
the value of nothing. Though the manufacturer has his wages advanced 
to him by his master, he, in reality, costs him no expense, the whole value 
of those wages being generally restored, together with a profit, in the im- 
proved value of the subject upon which his labor is bestowed. But the 
maintenance of a menial servant never is restored. A man grows rich by 
employing a multitude of manufactures : he grows poor by maintaining a 
multitude of menial servants. The labor of the latter, however, has its 
value, and deserves its reward as well as that of the former. But the labor 
of the manufacturer fixes and realises itself in some particular subject or 
vendible commodity, which lasts for some time at least after that labor is 
past. It is, as it were, a certain quantity of labor stocked and stored up to 
be employed, if necessary, upon some other occasion. That subject, or, 
what is the same thing, the price of that subject, can afterwards, if neces- 
sary, put into motion a quantity of labor equal to that which had originally 
produced it. The labor of the menial servant, on the contrary, does not fix 
or realise itself in any particular subject or vendible commodity. His serv- 
ices generally perish in the very instant of their performance, and seldom 
leave any trace or value behind them, for which an equal quantity of service 
could afterwards be procured. 

The labor of some of the most respectable orders in society is, like that 
of menial servants, unproductive of any value, and does not fix or realise 
itself in any permanent subject, or vendible commodity, which endures 
after that labor is past, and for which an equal quantity of labor could 
afterwards be procured. The sovereign, for example, with all the officers 
both of justice and war who serve under him, the whole army and navy, 
are unproductive laborers. They are the servants of the public, and are 
maintained by a part of the annual produce of the industry of other people. 
Their service, how honorable, how useful, or how necessary soever, produces 
nothing for which an equal quantity of service can afterwards be procured. 
The protection, security, and defence of the commonwealth, the effect of 
their labor this year, will not purchase -its protection, security and defence 
for the year to come. In the same class must be ranked some both of the 
gravest and most important, and some of the most frivolous professions : 
churchmen, lawyers, physicians, men of letters of all kinds ; players, buf- 
foons, musicians, opera-singers, opera-dancers, etc. The labor of the meanest 



258 PRINCIPLES OF POLITICAL ECONOMY 

of these has a certain value, regulated by the very same principles which 
regulate that of every other sort of labor, and that of the noblest and most 
useful, produces nothing which could afterwards purchase or procure an 
equal quantity of labor. Like the declamation of the actor, the harangue 
of the orator, or the tune of the musician, the work of all of them perishes 
in the very instant of its production. 

Both productive and unproductive laborers, and those who do no labor 
at all, are all equally maintained by the annual produce of the land and 
labor of the country.* This produce, how great soever, can never be infinite, 
but must have certain limits. According, therefore, as a smaller or greater 
proportion of it is in any one year employed in maintaining unproductive 
hands, the more in the one case and the less in the other will remain for 
the productive, and the next year's produce will be greater or smaller ac- 
cordingly ; the whole annual produce, if we except the spontaneous 
productions of the earth, being the effect of productive labor. 

John Stuart MilP makes use of the same distinction in the 
following paragraphs, though he modifies it so as to allow for 
labor which is mediately, or indirectly, productive. 

LABOR IS INDIRECTLY AS WELL AS DIRECTLY 
PRODUCTIVE 

I shall therefore, in this treatise, when speaking of wealth, understand 
by it only what is called material wealth, and by unproductive labor only 
those kinds of exertion which produce utilities embodied in material objects. 
But in limiting myself to this sense of the word, I mean to avail myself to 
the full extent of that restricted acceptation, and I shall not refuse the 
appellation productive to labor which yields no material product as its direct 
result, provided that an increase of material products is its ultimate conse- 
quence. Thus, labor expended in the acquisition of manufacturing skill, I 
class as productive, not in virtue of the skill itself, but of the manufactured 
products created by the skill, and to the creation of which the labor of 
learning the trade is essentially conducive. The labor of officers of govern- 
ment in affording the protection which, afforded in some manner or other, 
is indispensable to the prosperity of industry, must be classed as productive 
even of material wealth, because without it, material wealth, in anything 
like its present abundance, could not exist. Such labor may be said to be 
productive indirectly or mediately, in opposition to the labor of the plough- 
man and the cotton spinner, which are productive immediately. They are 

1 Principles of Political Economy (from the Fifth London Edition), Bk. I, 
Chapter III, p. 76. New York, 1909. 



PERSONAL AND PROFESSIONAL SERVICE 259 

all alike in this, that they leave the community richer in material products 
than they found it ; they increase or tend to increase material wealth. 

By unproductive labor on the contrary, will be understood labor which 
does not terminate in the creation of material wealth; which, however 
largely or successfully practised, does not render the community and the 
world at large richer in material products, but poorer by all that is consumed 
by the laborers while so employed. 

All labor is, in the language of political economy, unproductive, which 
ends in immediate enjoyment, without any increase of the accumulated 
stock or permanent means of enjoyment. And all labor, according to our 
present definition, must be classed as unproductive, which terminates in a 
permanent benefit, however important, provided that an increase of material 
products forms no part of that benefit. The labor of saving a friend's life 
is not productive, unless the friend is a productive laborer, and produces 
more than he consumes. To a religious person the saving of a soul must 
appear a far more important service than the saving of a life ; but he will 
not therefore call a missionary or a clergyman productive laborers, unless 
they teach, as the South Sea Missionaries have in some cases done, the 
arts of civilization in addition to the doctrines of their religion. It is, on 
the contrary, evident that the greater number of missionaries or clergymen 
a nation maintains, the less it has to expend on other things ; while the 
more it expends judiciously in keeping agriculturists and manufacturers at 
work, the more it will have for every other purpose. By the former, it 
diminishes, cceteris paribus^ its stock of material products ; by the latter 
it increases cceteris. 

Both these eminent writers seem to look upon the produc- 
tion of vendible commodities, either directly or indirectly, as 
the end of economic activity. From that point of view, even 
cheap and tawdry articles which are of no use to anyone, as a 
puritanical moralist would say, are nevertheless wealth, and the 
labor which produces them is productive labor. On the other 
hand, the philosopher who elevates our thoughts above the 
plane where such things are enjoyed would be an unproductive 
laborer. And yet this philosopher might be doing infinitely 
more for the ultimate prosperity and greatness of the nation 
than the manufacturer of such articles. 

There is, however, something finely democratic in the attitude 
of these writers. It assumes that whatever the people want, as 



26o PRINCIPLES OF POLITICAL ECONOMY 

expressed either by their votes or by their purchases, they are 
entitled to have, and that no one, not even the philosopher, 
should set himself up as a moral censor. Their judgment, as 
expressed through their purchases of vendible commodities, is 
the final word in such matters. Only such labor as supplies, 
either directly or indirectly, things which the people are will- 
ing to purchase is to be regarded as productive according to 
their point of view. 

Distinction similar to that between producers' and con- 
sumers' goods. Another and more satisfactory way of looking 
at this distinction between productive and unproductive labor 
is to compare it with the distinction between producers' and 
consumers' goods. It would not occur to anyone that a writer 
was disparaging bread if he were to say that it is a consumers' 
good and not a producers' good. To say that a sewing machine 
is a producers' good, while a coat is a consumers' good, is not 
necessarily to place the machine in a superior class and the 
coat in an inferior class. And yet to say that a coat is a con- 
sumers' good may mean very much the same as to say that it 
is an unproductive good. In the above passage Mill distinctly 
states that unproductive labor is not necessarily useless labor. 

Much of that which these writers include under unproductive 
labor may, however, be productive even in the technical sense 
in which they use that word. A menial servant, for example, 
who saves the time of his employer and enables him to devote 
his energies exclusively to highly productive work really con- 
tributes to the production of vendible commodities, even though 
he himself has no direct connection with any such article ; but 
if a menial servant or anyone else merely helps a man of leisure 
to while away his idle hours by furnishing amusement or enter- 
tainment, his work can scarcely be called productive in any sense. 

Wherein labor contributes to national prosperity and wherein 
it does not. After all, the important distinction is not between 
the labor which produces vendible commodities and that which 
does not. The distinction of real importance is that between 



PERSONAL AND PROFESSIONAL SERVICE 261 

labor which contributes to the well-being, prosperity, and great- 
ness of the nation and that which does not. Labor may pro- 
duce a commodity which sells for a high price on the market, — 
which satisfies an intense desire which people will pay a high 
price to have gratified ; and yet, if the desire is a vicious one, 
if its gratification weakens in mind or body those who buy it, 
or if it merely incapacitates them temporarily for useful work, 
that labor would have to be classed as unproductive. On the 
other hand, the labor of the musician, the poet, or the preacher, 
if it does not tend to produce softness, but inspires to strenu- 
osity and productivity, if it rationalizes the consumption of 
wealth, if it makes people desire the right things, would have 
to be classified as highly productive. To be sure, a book, a 
poem, or a picture is a vendible commodity, and its producer 
would be called a productive laborer under the classic definition. 
If one wanted to insist upon it, one might go so far as to say 
that the sound waves produced by the musician or the talker 
are also material things and vendible, but it is not necessary 
to go so far as that. 

This distinction not so clear as the other. One disad- 
vantage in the position which we are taking in favor of 
the view that the important distinction is that between labor 
which adds to the well-being of the nation and labor which 
does not, is that it leaves a great deal to the opinion of the 
student. Whether labor produces a vendible commodity or not 
is generally a question of ascertainable fact. Whether it is 
good for the nation or not is sometimes a matter of opinion. 
There could scarcely be any denial, for example, that a distil- 
lery produced a vendible commodity, but there has been a great 
deal of difference of opinion as to whether it was a benefit or 
an injury to the nation. On the other hand, it could scarcely be 
claimed that a moral leader who persuaded people to become 
total abstainers was producing vendible commodities, but there 
are those who hold to the opinion that he is contributing to the 
general well-being of the nation. 



262 PRINCIPLES OF POLITICAL ECONOMY 

Granting the advantage, from the standpoint of clearness, of 
the classical distinction between productive and unproductive 
labor, the present writer nevertheless contends that the distinc- 
tion between that labor which is beneficial and that which is 
not is much more important. Probably as large a proportion 
of the labor which is engaged in producing material commodi- 
ties for the market is wasted as of the labor which is not so 
engaged. Probably as large a proportion of that labor which is 
not engaged in producing material commodities is advantageous 
to the nation as of that which is so engaged. The prosperity 
and well-being of the nation will depend upon the proportion 
of the people who are doing useful work rather than upon the 
proportion that are producing material commodities. 

All labor which is not engaged in the production or han- 
dling of material commodities which are bought and sold on the 
market is grouped, not only in this chapter but in various cen- 
sus reports and other public documents, as professional and per- 
sonal service. Professional service is limited to a few learned 
or highly skilled occupations such as law, medicine, theology, 
teaching, governing, acting, etc. Personal service includes such 
a multitude of occupations as would fill a small catalogue. 
Barbers, bootblacks, valets, domestic servants, who render their 
service directly rather than indirectly through the medium of 
a material product, may be said to render personal service. If 
it is genuine service, whether it is professional or personal, it 
is a factor in the prosperity, power, and greatness of the nation. 



PART THREE 

EXCHANGE 

Which has to do with the buying and selling of commodities 



263 



CHAPTER XXII 

VALUE 

Exchange a part of the division of labor. In the chapter 
on the Division of Labor it was pointed out that there is a 
great advantage to be gained from speciahzation. When the 
whole industrial society is so organized that each person can 
do that for which he is best fitted by nature, training, inclina- 
tion, and location, the general quality of the work is better 
than it would be if everyone had to learn a great many 
things. It was also pointed out that the division of labor neces- 
sitates the exchange of products and services. In the economics 
of the private family the subject of exchange is so unimportant 
as to be ignored altogether. Within the family a sort of primi- 
tive communism exists, so that even though there may be a 
division of labor among the members, there is practically no 
trading or bartering among them. In the larger industrial society, 
however, unless it is organized also on a communistic basis, 
there is a great deal of trading, bartering, and exchanging. 
Therefore exchange has come to be one of the most important 
departments of the subject of public economics, or political 
economy. Our whole system of trading, transporting, and mer- 
chandising is a necessary part of an industrial system which is 
characterized by the division and specialization of labor. 

Valuation a part of exchange. An important part of this in- 
tricate system of exchanges is the process of valuation, or the 
evaluating of goods and services. It would be difficult to do 
very much exchanging without beginning to think in terrhs of 
value. In fact, even in the simplest case of barter, as when boys 
swap marbles, each barterer in his mind compares the desira- 
bility of the objects that are to be exchanged. To compare 

265 



266 PRINCIPLES OF POLITICAL ECONOMY 

the desirability of the objects is to think in terms of value. 
In . its original and individual sense the value of a thing was 
the esteem in which it was held ; in a somewhat more highly 
developed, or social, sense the value of a thing was the esteem 
in which it was held by all those who were interested in it. 
When men in considerable numbers were evaluating and com- 
paring the same group of commodities, a market was said to 
exist. Where a market existed for an object, its value was the 
esteem shown for it on the market. The sign, or symptom, 
of that esteem is the fact that men were making sacrifices 
in order to get the object; that is, they were either labor- 
ing to get it or they were giving up other desirable things in 
exchange for it. 

Value in exchange. This willingness to give something — 
either labor or another desirable object — in exchange for a 
thing has finally come to be regarded by most writers as the 
value of the thing, instead of being, as originally, merely as 
the sign, or symptom, of the esteem in which it was held. A 
brief but satisfactory definition of market value, or of value as 
it is understood on the market and in commercial circles, is 
''power in exchange." Under this definition the value of an 
article is the power which it confers upon its owner to com- 
mand other desirable things in peaceful and voluntary exchange. 
There has come, therefore, a change in the popular meaning 
of the word value. In modern usage the esteem in which 
the object is held, or the desire which is felt for it, is that 
which gives it value instead of being the value itself. 

When value is defined as power in exchange, it must not 
be confused with a mere ratio of exchange. A thing which 
confers upon its owner the power to command other things in 
peaceful and voluntary exchange has power or influence over 
the minds of men ; it influences their choice and gets them 
to do things which they would not otherwise do. Within cer- 
tain limits, it exercises control, or at least influence, over 
motives. Of course, when things exchange against one another, 



VALUE 267 

it must always happen that they exchange in certain ratios ; 
but the ratio is merely incidental and is not the essential 
characteristic of value. 

To value is to esteem. The purchasing power, or value in 
exchange, of an object is not always proportional to the esteem 
which is felt for it, or the intensity of the desire for it. Among 
wanderers on a desert a small portion of water would be ex- 
ceedingly precious ; but if none of them had anything to give 
in exchange for it, it would not have much purchasing power. 
It would not have much market value ; that is, its owner would 
not realize very much from its sale. It would, however, be held 
in the very highest esteem ; it would be intensely desired ; it 
would have great power over human motives ; men would go to 
any length to get it ; and if they had many things to give in 
exchange for it, it would have great power in exchange. The 
situation of some thirsty men on a desert with nothing to give 
in exchange for water is, however, very unusual. In the ordinary 
market place, men have something to give for whatever they 
desire most. The thing which is intensely desired, esteemed, 
or appreciated will, under such circumstances, always command 
many other desirable objects in peaceful and voluntary exchange. 

Some writers have attempted to remove this difficulty by 
distinguishing between value in use and value in exchange. 
The tendency of later writers is to do away with this distinction. 
Value in use is nothing except utility, whereas value in exchange 
is simply value. There is, however, a very close connection 
between utility and value. Utility is the power to satisfy a want 
or gratify a desire, but value is the power to command other 
desirable things in peaceful and voluntary exchange. Value 
depends upon utility, since nothing could have value unless 
it had the power to satisfy a desire of some kind. In other 
words, nobody would give anything in peaceful and voluntary 
exchange for the article in question unless he desired it. On 
the other hand, however intensely he might desire it, if he 
had nothing to give in exchange for it, and everyone else were 



268 PRINCIPLES OF POLITICAL ECONOMY 

in the same condition, it would not have much power in ex- 
change. The water in the foregoing illustration would have great 
utility but no great value, — certainly no great market value. 

Censorious criticisms upon market value. There is, how- 
ever, still another sense in which both value and utility are 
sometimes used. One who has strong ideas on the subject 
will sometimes assert that a given commodity is '' really worth " 
very little, even though everybody seems to desire it and to be 
paying a high price for it, or that it is '' really worth " a great 
deal, even though no one else seems to esteem it or to be will- 
ing to pay much of anything for it. In this case the speaker is 
assuming the function of a moral or economic censor and is 
passing judgment upon the desires of the people. His judg- 
ment may be sound and that of the multitude unsound, or vice 
versa. There are, however, always those who have ideas on 
the subject of ''real" value as opposed to market value, and 
of real utility as opposed to the popular idea of utility. Their 
idea of *' real " utility is the power to satisfy a commendable 
desire, whereas economic writers have generally, though not 
universally, defined utility as the power to satisfy any sort 
of desire. 

Distinction between value and price. Value should also be 
distinguished from price. The price of an article, as has been 
explained many times by economists, is merely its value ex- 
pressed in terms of some single commodity which the com- 
munity has generally agreed upon as the measure of value and 
the medium of exchange. This commodity is usually money. 
Whenever the word price is used, if it is used properly, it 
means value expressed in money, or the amount of money 
which will exchange for a given article. Wherever the word 
vahie is used, at least in connection with the general condi- 
tions of the market, it means its general power in exchange 
against other articles, of which money is only one. The cheapen- 
ing of money tends to create a general rise in prices but not 
a general rise in price values. 



VALUE 269 

To summarize, the economic value of an object is variously 
defined as 

1 . Its price, that is, the amount of money for which it sells ; 

2. Its utility, which may mean 

a. Its power to satisfy any desire, 

b. Its power to satisfy a commendable desire ; 

3. Its power to affect the well-being of 

a. An individual, 

b. Society, or the nation ; 

4. Its power over human motives, 

a. Causing men to exert themselves in order to get it, 

b. Causing men to give other desirable things in ex- 

change for it, because of 
(i) The intensity of their desire for it, 
(2) The abundance of other desirable things in their 
possession. 

Since we are here concerned with the general problem of 
exchange and market value, the last of these four definitions 
will be used in this chapter. If we may accept " power in 
exchange " as a good working definition of market value, or 
value as it is used on the market and in our general system 
of exchange, several questions will at once arise. One of these 
is. Why do some things possess this power and others not ? 
Another is. Why do some things possess more of it than 
others ? Or, again. Why does the same thing possess more of 
it at one time or place than at another? 

Value attaches to concrete things. Not much headway can 
be made in answering any of these questions, until we clear 
the way by certain necessary explanations. Some of these 
explanations can be understood only after some very hard and 
clear thinking. In the first place, we must distinguish between 
things in general and concrete units. It is one thing to speak 
of the value of bread in general ; it is another thing to speak 
of the value of a loaf of bread. It is one thing to speak of 
the value, or the lack of value, of air in general, and another 



270 PRINCIPLES OF POLITICAL ECONOMY 

thing to speak of the value, or lack of value, of a given cubic 
yard of air. If one will look around and see what is going on, 
one will notice that men are not exchanging things in general, 
but only concrete units or quantities of things, — not wheat in 
general, but a given number of bushels of wheat of a given 
grade ; not money in general, but a given number of dollars, 
francs, or pounds ; and even if air or water were exchanged, 
it would not be air or water in general, but some cubic yards 
or gallons in definite numbers. 

This distinction between things in general and concrete 
units or quantities will eliminate forever the confusion that 
sometimes results when that distinction is not made. For 
example, we are sometimes told that air is of immeasurable 
utility, and yet it has no power in exchange. If one will 
think, however, not of air in general but of a definite cubic 
yard of air which may be boxed up (it might even be offered 
for sale), and then if one will ask one's self how much utility 
to him is possessed by that particular cubic yard of air, he will 
find that it is of no use to him whatever. If it were of any use 
to him, that is, if he would be any better off with it than with- 
out it, he would be willing to give something in exchange for 
it ; it would then possess value, or power in exchange. 

Total utility and final, or marginal, utility. This means, in 
other words, that there are two distinct ideas of utility : one is 
total utility and the other is sometimes called specific, some- 
times final, and sometimes marginal utility. We gain an impres- 
sion of the total utility of air when we think what would happen 
to us if all the air in existence were suddenly annihilated, or if 
we individually were shut off from access to air. From this 
point of view the total utility of air is incalculable. But if we 
were to consider what would happen if a definite cubic yard 
were annihilated or if we were shut off from access to it, we 
get a very different impression. As a matter of fact, it would 
make no difference to anybody, because there would be enough 
left to satisfy completely every desire for air. 



VALUE 271 

In this world of adjustment, improvement, and progress, or 
of maladjustment and retrogression, the problem of having 
more or of having less of various things is always the impor- 
tant problem. How desirable is it that there should be more 
air than there is, or how undesirable is it that there should be 
less air than there is ? Apparently this is a matter of indiffer- 
ence. It is for this reason that in a practical, workaday world, 
where we are trying to improve our condition or to prevent 
it from becoming worse, our interest in material things cen- 
ters in the question as to how, through them, we can increase 
our well-being. Can we, for example, by increasing the quan- 
tity of a certain commodity, improve our condition, or can we 
not ? If we can, then we have an excellent reason for trying 
to increase our supply. If we cannot, there is no such reason. 
No social utility would be promoted by increasing the supply 
of air or by offering a price for increasing it. There is, there- 
fore, no social or individual reason why it should possess any 
value or any power in exchange. On the other hand, if you 
think of an article of which you can say that you would be 
better off if you had a little more of it, or worse off if you had 
a little less than you have, you have a perfectly good individual 
reason for increasing your possession. Or if the community 
can say that it would be better off if it had more of it, or worse 
off if it had less, then the community would have a perfectly 
good reason for desiring to increase the supply. This is the 
case with everything which has value. If the community thinks 
that it would be better off if it had more of it or worse off 
if it had less, the article in question will have value. 

A moral philosopher might conclude otherwise ; that is, 
he might think that the desires of the people were vicious 
and that they would be worse off if they had more of 
a certain article, whereas they themselves think they would 
be better off if they had more of it. It is the desires of 
the multitude rather than the conclusions of the moral philoso- 
pher which determine market value. This may be called a 



2/2 PRINCIPLES OF POLITICAL ECONOMY 

functional theory of value. The function of value in a society 
is to induce producers to produce. It is a symptom that 
more of the article possessing value is wanted. It is, at the 
same time, a means of getting more ; that is, if people will 
offer desirable things in exchange for an object, someone may 
be induced to produce it. 

The first law of the market. The first law of the market 
is that things of the same kind and quality tend to have the 
same value at the same time and place. That is to say, at any 
given time and place, if there are a large number of units, all 
exactly alike and equally desirable, they will all tend to sell at 
the same price and have the same power in exchange. If they 
are unlike, some of them being more desirable than others, of 
course some will have more power in exchange than the others. 
Again, the values may, on a feverish market, change from 
minute to minute, that is, so rapidly as to create the illusion 
of selling at different prices at the same time. Or, again, in 
different portions of the same market similar things some- 
times sell at different prices. The tendency, however, is toward 
a uniform price at the same time and place. Where a com- 
modity has become standardized so that there are many units 
that are equally desirable, it has become customary to buy the 
article by quantity, without taking the trouble to pick out the 
specific units desired. Wheat, coal, cotton, pig iron, and many 
other commodities are so graded and standardized as to sell in 
this way. On the other hand, there are a great many com- 
modities that are not easily standardized. In these cases the 
purchaser will usually insist on picking out the individual units 
which he desires. Race horses, dwelling houses, farms, build- 
ing lots, and a multitude of other things will probably always 
have to be bought and sold in this way. 

A thing has value only when someone wants it. A con- 
crete article of the kind just described, or a definite quantity 
of a standardized article, will have power in exchange, of 
course, only on condition that somebody happens to desire it. 



VALUE 273 

No one will give any desirable thing in peaceful and voluntary 
'exchange for something which he does not desire to possess. 
Again, the quantity of value which a thing will possess, that 
is, the number of other things which will be given in exchange 
for it, depends on how much it is desired in comparison with 
those other things. If the article in question is very much 
wanted and a number of other things are not much wanted, 
then a considerable quantity of these other things will be given 
in exchange for it. 

Two reasons why a thing may not be wanted. The next 
question is. Why are some things desired and others not ? And 
why are some desired more than others ? There are two 
primary reasons why an article may not be desired at all. In 
the first place, it may possess no total utility ; that is, there 
may be no use to which it can be put, so far as anyone knows. 
There are not, however, very many such things. The other 
reason is that there are so many other things just like the one 
in question as to more than satisfy the desire. Where water is 
very scarce the desire for it becomes intense ; where it is abun- 
dant, the desire is completely satiated, so that if a specific barrel 
or gallon of water were offered for sale, no one would desire 
it at all. In such a situation water would have as little value 
as though there were no possible use to which it could 
be put. 

One might go even farther and name articles which, 
though capable of satisfying desires or of being put to im- 
portant uses,, have yet become worse than worthless, — that is, 
have become nuisances through their overabundance. Many 
of the weeds which infest our fields belong in this class. Water 
in a swampy region also comes to possess a negative value, — 
that is, men will go to considerable expense to get rid of a part 
of it, — and yet it may be perfectly good water, capable of 
contributing not only to human life but to plant and animal 
life as well. Rabbits in Australia and English sparrows in 
America will serve as further illustrations. 



274 PRINCIPLES OF POLITICAL ECONOMY 

A commodity has value only when there is not enough of it. 

We therefore reach the general conclusion that an article 
(that is, a definite object, such as may be bought and sold) has 
value only when it is wanted, and that it is wanted only when 
there are so few objects like it as to leave the desire for it par- 
tially unsatisfied. If there are so many others like it that the 
desire is completely satiated, the object in question will not be 
wanted at all ; and that holds true of each and every one con- 
sidered singly. But if there are not enough to go round and 
satisfy everybody, each and every such object will be desired 
and will consequently have a value. 

Following the same line of reasoning, we may reach the 
further conclusion that an object has much value when it is 
much desired, that is, when there are many people who desire 
it and each one desires it intensely ; it has little value when it 
is not much desired, that is, when there are few people who 
desire it or when they who happen to desire it, desire it with 
a low degree of intensity. Its power in exchange as compared 
with other things will depend on how intensely it is desired in 
comparison with other things. 

Physiological basis of the law of demand and supply. The 
great law of supply and demand is thus seen to have a physio- 
logical and psychological basis. The expression '' supply and 
demand " is merely a formula ; back of this formula there is the 
physiological fact pointed out in Chapter' II. Every desire is 
satiable, and the more nearly the desire approaches the state 
of complete satiation, the less intense it becomes. Thus the 
reason that any superabundant article under ordinary circum- 
stances has no value is because it is so abundant that every 
desire is completely satiated. That is the reason why water has 
little or no value in a well-watered country. Wherever it is so 
scarce that the desire for it is not completely satiated, as is the 
case in an arid climate where people are trying to farm, it has 
a value. It is the physiological or psychological state of the 
desire which furnishes the real basis for the law of supply 



VALUE 275 

and demand. With a given demand, the greater the supply the 
more nearly all desires will approach the point of satiation, and 
the more indifferent everyone's attitude toward the object 
becomes ; on the other hand, the smaller the supply, the more 
intense the desire for each unit of that supply, and the more 
anxious men are to get it. 

As there are two reasons mentioned above why an object 
may not be desired at all, there are also two similar reasons 
why the desire for it may be one of little intensity. In the first 
place, the possible uses to which the object may be put may be 
of very little consequence to anybody ; it may gratify a mere 
whim or caprice. In the second place, the supply m.ay be so 
great that the desire is almost completely satisfied, and in this 
case no one will care very much about getting more than he 
has, nor will anyone give very much to get more. Under either 
set of circumstances no one gains very much in the way of 
satisfaction or well-being if some producer adds to the supply ; 
no one loses very much if some destroyer subtracts from the 
supply. This may seem very simple, but it is one of the most 
important considerations in the whole field of economics ; for 
the same law of value, as we shall see when we take up the 
study of distribution, applies to the labor of men as well as 
to material commodities. There are the same fundamental 
principles underlying the law of supply and demand in one 
case as in the other. 

The relation of utility to value. When we say that an 
object has value only when it is wanted, we are virtually saying 
that it has value only when it has utility, for utility is by defini- 
tion the power to satisfy a want or a desire. Whether that 
want be physiological, like hunger, or whimsical, like the desire 
for the latest novelty, does not affect the case in the ordinary 
economic sense. Economists have generally refrained from 
passing moral judgment on the quality of desires, though there 
is a tendency to depart from this tradition. If the gratification 
of a vicious desire does harm in the long run, it tends to 



2/6 PRINCIPLES OF POLITICAL ECONOMY 

destroy the well-being and prosperity of the community. This 
is a consideration of great economic importance. The tend- 
ency, however, in a democratic society has been to assume that, 
whatever the people happen to like, it is their affair and not 
the affair of the economist or the moral philosopher. If there 
is a popular demand for a cheap and tawdry article, or for 
demagogical politics, there would seem to be equally good rea- 
sons in either case for saying that the people should have what 
they like. To set one's self up as a moral censor, to pass judg- 
ment on the desires of the people either in commercial or in 
political affairs, has generally been considered undemocratic. 
Under the impulse of this rather extreme ideal of democracy, 
utility has been defined, as stated above, as the power to satisfy 
desires, whether the desires be good, bad, or indifferent. Any 
object, therefore, which possesses utility, or the power to satisfy 
a desire, possesses one of the essential factors in value. 

Meaning of scarcity. When we say that an article h^s value 
only when the desire for it is left unsatisfied, we are virtually 
saying that it has value only when it is scarce. Scarcity is by 
definition insufficiency to satisfy desires. A thing may be rare 
without being scarce ; that is to say, however little there may 
be of a certain article, if that little is more than sufficient to 
satisfy all desires, it can hardly be said to be scarce ; or how- 
ever much there may be of a thing, speaking absolutely, if there 
is not enough to satisfy all desires, it is said to be scarce. 
Flies in the winter time may be rare, but they are not scarce 
in the technical economic sense, since even then there are more 
than are wanted. Speaking absolutely, there may be more 
grass than weeds on a given farm, but relatively to the farmer's 
desires, grass may be scarce while weeds are superabundant. 
If we assume that the article in question is appropriable, or 
capable of being possessed and enjoyed, and not, like the 
moon, entirely beyond our reach, we may say that anything 
which possesses both utility and scarcity will have power in 
exchange, and nothing else whatsoever will have that power. 



VALUE 277 

The utility of an article is the basis of the demand for it ; 
the scarcity of the article is the measurable limit of its supply. 
Every boy knows that the first apple which he eats at any one 
time tastes better than the second, provided they are alike, and 
the second better than the third, and so on. He knows also 
that, however capacious his appetite, if the supply of apples 
holds out, he will ultimately reach a point when he doesn't 
care for any more ; in other words, he will reach the point of 
complete satiation so far as apples are concerned. When this 
point is reached, apples have lost their utility for him, and he 
becomes indifferent to them. He may still be willing to give 
something in exchange for them in anticipation of to-morrow's 
hunger, but if he has a supply sufficient to satisfy not only 
present but future desires, then he becomes absolutely indiffer- 
ent and gives nothing in exchange for them. 

Social value. We now approach a secondary phase of the 
law of value. Even though his own desire for apples may be 
completely satiated, not only in the present but in the antici- 
pated future, his commercial instinct may prompt him to prize 
them, not because he himself desires to consume them, but 
because he can trade them to someone else for objects which 
he himself desires. At this stage he has arrived at the point 
where he begins to take account of social utility as well as of 
individual utility. If he perceives that there is in society around 
him an unsatisfied desire for apples, he may make use of that 
unsatisfied desire to acquire desirable things in exchange for 
his own surplus apples. This soul-compelling power, that is, 
power in exchange, which commodities possess on the market, 
he is able to make use of to his own advantage. Thus we see 
a great many men producing articles far in excess of their own 
needs, because they know that these articles are exchangeable for 
other things which they need. We see a considerable body of 
men doing nothing except to trade in objects of general social 
desire. But the laws which govern social valuation are funda- 
mentally the same as those which govern individual valuation. 



2/8 PRINCIPLES OF POLITICAL ECONOMY 

There must be somebody in the community round about who 
has less of the object than he wants ; otherwise neither the 
producer nor the trader would be able to exchange the object 
for other desirable things. " 

Diminishing utility. The satiability of the desire for a given 
commodity leads to what is known as the law of dimirtishing 
utility, desire and utility being reverse aspects of the same 
thing. The desire exists in the human being and is that which 
the object of the desire is capable of satisfying. Utility exists 
in the object outside the human being and is that which is 
capable of satisfying his desire. In proportion as the human 
being's desire is capable of being satisfied, in that proportion 
^ does the utility of 

the object which 
satisfies that desire 
diminish as its quan- 
tity increases. This 

^D x^ diminishing utility 

of a desirable ob- 
ject is sometimes illustrated by means of a diagram, of which 
the above will serve as a sample. 

Let us measure the quantity of a certain commodity along 
the line OX, and the intensity of the desire for it along the line 
OY. When the quantity is represented, for example, by the 
line OG, each unit is desired with an intensity represented by 
the line OE ; and when the quantity is represented by the line 
OH, the desire is so well satisfied that the intensity of the 
desire is now represented by the line OF. If the quantity were 
to increase until it was represented by the line OD, all desires 
would be satiated ; that is, the desire for any particular unit of 
the supply would have no intensity, — there would be no desire 
left. And, finally, if the quantity were to increase still farther, 
the commodity might be considered as a nuisance, and men 
might begin to desire to have less of it rather than more. 
The curve A BCD becomes the utility curve according to the 




VALUE 



279 



assumptions. Just what shape this curve would take in any 
individual case would be hard to determine. One thing, how- 
ever, is certain, — and this is the really essential thing, — that, 
whatever its shape, it is a descending curve. Its distance from 
the line OX diminishes as we approach the point D. That is 
as certain as that a desire is satiable. Therefore we are safe 
in using a descending curve to illustrate the decline in the 
intensity of the desire for a commodity as the quantity of the 
commodity increases in proportion to the number of people 
who desire it. 

The total utility of the commodity is represented by the 
surface bounded by the lines OX, OV, and the curve ABCD. 



Y A 




V 



D 



O D 



Its marginal utility, that is, the effective utility of any single 
unit of the supply, is represented by the line OE or BG when 
the quantity is OG, and by the line OF or CH when the 
supply is OH. 

If now we consider two commodities whose quantities and 
utilities were represented by the two diagrams above, we shall 
see how the relative intensity of the desires for the two 
commodities will affect their relative values. 

Let us assume that the curves ABC in the two diagrams 
represent the diminishing intensity of the desire for potatoes 
and oranges respectively, and the line OD in each diagram the 
available quantity of each commodity. The quantity of potatoes 
being so much larger than that of oranges, the desire for them 
is much more nearly satiated than is the desire for oranges, 
though the total utility of potatoes is much greater ; that is to 



28o PRINCIPLES OF POLITICAL ECONOMY 

say, a pound of potatoes out of the total supply is very slightly 
esteemed or desired, whereas an equal quantity of oranges out 
of the much smaller supply is more highly esteemed or desired. 
Under these circumstances a pound of oranges would have as 
much power in exchange as several pounds of potatoes ; that 
is, oranges are, more valuable than potatoes. 

By increasing the number of diagrams, the relative power 
in exchange of a number of commodities could be illustrated 
in the same way. That, however, would introduce no new 
principle, but would only complicate matters. 



CHAPTER XXIII 

SCARCITY 

Causes of scarcity. It was shown in the last chapter that 
commodities must be both desirable and scarce in order to 
possess value. We have now to inquire why such things are 
scarce. There are four reasons which come within the limits 
of our comprehension. These we may call (i) ''the niggard- 
liness of nature," (2) the expansion of desires, (3) the cost of 
production, and (4) monopoly., 

** Niggardliness of nature." When the term ''niggardliness 
of nature " is used, it is not intended to cast reflections upon 
nature, nor to imply that she is not bounteous in many respects. 
It is merely to call attention to a fact which cannot well be dis- 
puted ; namely, that in many places men have congregated in 
numbers greater than nature has there made provision for. De- 
sirable things are scarce in those places at least, and it is at 
least necessary to bring supplies from other places where there 
is a surplus. Moreover, there are many things which we desire 
which nature does not supply at all in the form in which we 
desire them, though she supplies the raw materials out of which 
we may make them. Again, some things which we desire can 
only be produced at certain times and seasons. They must 
therefore be preserved and kept for other times when they 
will be needed. 

Expansion of desires. The fact that nature does not supply 
us with everything we desire in the exact forms and at the 
exact times and places when and where we happen to desire 
them may be in part due to the fact that we desire more re- 
fined products than grow in a natural state, or to the fact that 
great numbers of us choose to live in places where such 

281 








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SCARCITY 283 

products do not grow in sufficient abundance. It is only a 
symptom of the maladjustment between man and nature. It is 
not necessarily the fault of either man or nature ; it is simply 
a fact of experience, and we must make the best of it. There 
is, however, a marked tendency for human desires to expand. 
'' When goods increase, they are increased that eat them." 
In the language of the day, *'The richer we get, the more we 
want." Therefore we must expect an indefinite continuation of 
the condition wherein some desirable things are insufficient in 
quantity to satisfy everybody. We shall therefore continue try- 
ing to increase the supply of desirable things in the forms in 
which they are wanted, and at the times when and the places 
where they are wanted. This is called the production of utili- 
ties, or, more properly, the adding of utilities to material things, 
— form utility, time utility, and place utility. 

Cost. If the efforts which we have to make in order to pro- 
duce utilities were altogether pleasant and not in the least 
degree unpleasant or disagreeable, there is no reason why most 
things might not be produced in such abundance as to satisfy 
everybody completely. Some things, of course, cannot be in- 
creased by any human effort. Meteoric iron has long served as 
an illustration. Autographs of distinguished men of the past, 
the paintings of old masters, first editions of books, and a 
number of other illustrations might be given. But if we are 
speaking of an ordinary reproducible commodity, we are safe 
in saying that unless there were some difficulty in the way of 
indefinite reproduction, — some unpleasantness, irksomeness, 
or fatigue connected with its production, — its supply would 
certainly increase until everyone had all he wanted of it. 

Effort not always irksome. Illustrations are not hard to find 
of desirable commodities which have to be secured by human 
effort, but which, because the effort is pleasant rather than un- 
pleasant, become so abundant as to command no price. Trout 
are generally regarded as a delicacy and are greatly desired. 
They can only be caught by considerable muscular effort and 



284 PRINCIPLES OF POLITICAL ECONOMY 

by the exercise of great patience and skill. And yet, in certain 
communities where the demand is not very great and the fish- 
ing not too arduous, trout are caught for sport in such numbers 
as to supply the neighborhood. They become free goods and 
are given to those who desire them without money and without 
price. If there were more consumers, or fewer persons who 
enjoyed the sport of fishing, there would not be enough to go 
around. Those who did not get as many as they desired would 
then be willing to pay a price in order to get more. In other 
neighborhoods, flowers are grown for pleasure. The demand 
not being very great, and there being a number of people who 
enjoy gardening, there is such an abundance that everyone is 
supplied free of charge. Poultry raising is a pleasure to many 
people if they do not have to work too hard at it. In most 
neighborhoods, however, there is a demand for eggs and poultry 
that cannot be completely satisfied with the products of those 
who keep poultry for the pleasure of it. In order to induce 
these to produce more than is pleasurable, and to induce 
others to do the work who do not enjoy it at all, a price 
must be paid. The price is paid, virtually, to overcome the 
disinclination of producers. 

Cost is disinclination. All the reproducible products which 
sell on the market, and which are not monopolized, are limited 
in supply by some form of disinclination or reluctance to carry 
on the work of production. This disinclination may resemble 
that which one finds in the average fisherman, gardener, or 
poultry keeper, to whom the work in small doses is not 
irksome, or it may be of a different sort altogether. In the 
case of the fisherman, the gardener, and the poultry keeper, 
their work may be pleasant rather than unpleasant up to a cer- 
tain point. Almost anyone likes a certain amount of this kind 
of work, though some of us are easily satisfied. Beyond that 
point such work becomes irksome and fatiguing, and we keep 
at it only on condition that someone pays us for it. Up to that 
point it was play ; beyond that point it literally becomes work. 



SCARCITY 285 

Opportunity cost. Where two kinds of work are pleasurable 
and one has to choose between them, the fact that one has to 
surrender the one form of pleasure in order to pursue the 
other introduces an element of cost. It is reported of a certain 
man that he was passionately fond of gardening, but could 
never stick to it because as soon as he began to dig he found 
worms, and they reminded him of fishing, of which he was even 
fonder than of gardening. 

In other cases the work is disagreeable from the very start. 
There is no element of play in it. No one will do any of it 
unless he is paid for it. In still other cases the work itself 
would be pleasurable rather than disagreeable up to a certain 
point, if it were not for the fact that there is something else 
that one would rather be doing. A boy might not ordinarily 
mind working in the garden, but when there is a circus in town 
or a ball game going on, gardening suffers in his estimation by 
comparison with these other opportunities. Whenever we have 
to work long hours, there are pretty certain to be many other 
and more pleasurable things which we would rather do. Having 
to give up these other opportunities would make our work 
irksome even if it were not so of itself. 

The resistance which has to be overcome in order to get 
men to work. Cost, or cost of production, is the general name 
which we apply to the resistance which has to be overcome in 
order to get a thing produced. The real resistance is the 
resistance of the human will, as shown by the fact that even 
though physical effort has to be put forth, so long as the effort 
is pleasurable it does not have to be paid for As soon as it 
becomes irksome it has to be paid for. It is a matter of choice, 
and the price paid is a means of influencing choice. The irk- 
someness of the effort causes men to choose against putting 
forth the effort ; the price paid for the article causes them to 
choose in favor of it. Such words as irksome, unpleasant, or 
disagreeable describe certain efforts as they appeal to the 
mind. The words disinclination and reltLctance describe the 



286 PRINCIPLES OF POLITICAL ECONOMY 

attitude of the mind toward the efforts which men would not 
be wilUng to make unless they were rewarded for it. 

Distinction between play and work. The difference between 
play and work is found just here. Play is effort of both mind 
and body which is put forth for the sheer pleasure of the effort 
itself. Work is effort which is put forth for the sake of a re- 
ward which is detachable from the effort or the action. Under 
very favorable circumstances all necessary effort might con- 
ceivably take the form of play, and in that case there would be 
no such thing as cost of production. A community made up of 
people with very simple habits and very strenuous natures, and 
in a very favorable environment, might possibly reach such a 
delectable state. Having very simple habits, the inhabitants of 
this community would be able to get the greater part of their 
higher satisfactions out of those things whereof nature is boun- 
teous, such as the sky, the clouds, the verdure, and pleasant 
company. Living in a very favorable environment, they could 
produce such things as had to be produced with little effort. 
Having very strenuous natures, abounding in energy and de- 
lighting in effort, they could do the necessary work of produc- 
tion without any disinclination or reluctance. This, however, 
would be a kind of earthly paradise which we may dream about 
but are not likely to realize. 

Kinds of cost. When we say that the price of an article 
has to be high enough to cover the cost of production, we really 
mean that it has to be high enough to overcome the disin- 
clination of men to do whatever is necessary in order to pro- 
duce it. This disinclination or cost is of various kinds and 
degrees. Mention has been made of those operations which 
are inherently disagreeable from the very start. 'This may be 
called disutility or pain cost. In other cases there is no dis- 
inclination until the work has been carried so far as to produce 
a sense of fatigue. This may be called fatigue cost. Again, 
the disinclination may be due to the fact that the work in 
question prevents us from doing something else which we 



SCARCITY 287 

would rather be doing. This is called opportunity cost. Oppor- 
tunity cost arises whenever, in order to do a certain thing, 
one must give up the doing of something else which would 
be advantageous or pleasurable to one's self. The advantage 
which one gives up may be of two kinds : The thing which 
one gives up may be pleasurable in itself (that is, it may 
be play or amusement) or it may consist in the opportunity to 
earn money at some other job. In either case one must be 
paid for doing the thing in question, even though it is neither 
painful nor fatiguing ; otherwise one will avail one's self of 
another advantageous opportunity. 

Pain cost. Of these three forms of cost, pain cost is, in 
our day, the least important. In a rude state of society, when 
conditions were hard and enemies numerous, it may have been 
different. Nowadays, outside of a few dirty, dangerous, or 
otherwise disagreeable occupations, there is comparatively little 
work which is disagreeable in itself. When hours are long, 
much of it is likely to be fatiguing and irksome for that reason. 
But as prosperity and well-being increase, and general social 
conditions improve, opportunity cost comes to play a more 
and more important part. Even the possession of high wages 
or a large income creates opportunities for amusement or 
pleasure which otherwise would not exist. One then finds 
long hours more irksome than they would otherwise be, not 
because they are more fatiguing, but because they deprive one 
of those opportunities for pleasure which one's larger income 
enables one to enjoy. A well-educated man has more oppor- 
tunities for the pleasurable exercise of his faculties than an 
uneducated man ; therefore he needs more time in which to 
do these pleasurable things. If his services are desired, he 
must generally be paid more in order to induce him to give 
up these other opportunities. Far more important than that, 
however, is the fact that a well-trained man has many more 
opportunities to earn money than an untrained man. Among 
these opportunities he will choose only the one which he likes 



288 PRINCIPLES OF POLITICAL ECONOMY 

best. Whoever desires his services or his products must there- 
fore bid against all other opportunities which lie before the 
trained man. Work is not more painful or more fatiguing to 
the trained man than to the untrained man, but his labor 
costs more because of the opportunities which he gives up 
when he decides to do a certain kind of work. 

Increasing cost. As population increases or concentrates in 
certain areas the natural resources of those areas must either 
be w^orked more intensively or else the means of subsistence 
as well as the raw materials of industry must be brought from 
greater distances. To bring them from greater distances obvi- 
ously requires greater effort, unless new and improved methods 
of transportation are invented. Even with the best methods 
attainable it costs more to haul longer than to haul shorter 
distances. To work mines harder tends to exhaust them more 
rapidly. It is also possible to work land so intensively as to 
exhaust the soil unless great care is taken to put back in the 
soil as much plant food as is used up by the crops which are 
taken off. To exhaust either the mines or the soil will obvi- 
ously make greater and greater efforts necessary if a large 
population is to be provided for on the same scale as before 
the exhaustion took place. Poorer mines must be worked, and 
crops must be grown on poorer soil where more effort is 
required to get the same crop. 

Diminishing returns and increasing cost. Entirely apart 
from the exhaustion of the soil, however, is the great law of 
diminishing returns from land. This law, which is one phase 
of the universal law of variable proportions, will be discussed 
in detail in a chapter devoted to that subject (see Chapter XXX). 
For our present purpose it is only necessary to state and 
define the law. 

It is a well-known fact that land yields more per acre under 
intensive than under extensive cultivation. By intensive cul- 
tivation is meant the application of considerable quantities 
of labor and capital to each unit of land; by extensive 



SCARCITY 289 

cultivation is meant the application of smaller quantities of labor 
and capital. While land can be made to yield more when large 
than when small quantities of labor and capital are used in its 
cultivation, still there are limits to this rule. In the cultiva- 
tion of any particular crop there comes a point beyond which 
it does not seem possible, by any amount of labor, care, or 
cultivation, to increase the yield appreciably. Long before this 
point is reached, however, there is a tendency for the land to 
yield less in proportion to the labor and capital employed, even 
though it continues to yield slightly more per acre with each 
increased application of labor and capital to its cultivation. 

As a result of this law more effort is required to get from 
the soil of a given area subsistence for a large than for a small 
population. Rather than incur the increasing cost of produc- 
tion which would be necessary if an increasing population 
should attempt to get its subsistence from the same soil, men 
have uniformly chosen to spread their cultivation over wider 
areas, thereby incurring increased cost in transportation, or 
they have resorted to inferior soils within the boundaries of 
the original area, or they have done both. There is no good 
reason in the world why they should ever have done either of 
these things except that which is furnished by the law of 
diminishing returns. If they could have doubled, trebled, 
and quadrupled the production on the original area of good 
soil by merely doubling, trebling, and quadrupling the labor and 
capital used in its cultivation, there would never have been any 
reason for extending their cultivation. But when they found 
that by doubling the labor and capital they did not double the 
yield, even though the yield did increase somewhat, then they 
had an excellent reason for extending the area of cultivation. 

We have therefore several reasons why increasing effort is 
necessary to get increasing supplies for an increasing popu- 
lation. The law of diminishing returns is one ; the tendency 
toward the exhaustion of the soil, mines, and other natural re- 
sources is another ; the necessity of cultivating inferior soils 



290 PRINCIPLES OF POLITICAL ECONOMY 

is another ; and that of transporting materials greater distances 
is still another. All of these, however, are closely joined to- 
gether, and they mutually determine one another. Add to these 
the fact that increasing effort becomes increasingly irksome, 
because of increasing fatigue and increasing opportunity cost, 
and we have what may be known as the law of increasing cost. 
This law of increasing cost, in turn, is the chief factor in 
limiting production and keeping the supply of various com- 
modities so scarce as to give them a value. 

Monopoly. Among the factors which tend to make commodi- 
ties scarce nowadays, one of the most important is monopoly. 
A monopoly is an agency which has sufficient control over the 
supply of a given commodity to fix its price. Without this 
control over the supply neither principalities nor powers nor 
trusts can control prices. Without this control over supply, 
any attempt to fix prices above that level which would pay the 
cost of production would merely tempt other producers to 
enter the field and take the market away from the would-be 
monopoly. A high price would stimulate the outside and 
independent producers to increase their output. Until the 
would-be monopoly is in a position to prevent anything of this 
kind, it has not won the unenviable privilege of being called a 
genuine monopoly. Any agency which has succeeded in getting 
control of the supply of a commodity has become a monopoly, 
or at least a partial monopoly, whether it likes to be called by 
that name or not. Aside from the government, probably no 
such thing as an absolute monopoly exists. A partial monopoly 
exists whenever an organization exercises sufficient control over 
the supply of anything to enable it to fix its prices, even within 
a narrow zone, independently of competition. This means that 
the power of a partial monopoly over prices is not absolute. 
It may fix the price somewhat higher, but not much higher, 
than competition would fix it. Where a monopoly is not abso- 
lute, if it attempts to fix prices outside these limits it will create 
competition and destroy its power to control. 



SCARCITY 291 

This control may be exercised in two ways : first, the 
monopoly may decide upon the quantity to be produced, and 
then sell that quantity for whatever it will bring on the market, 
allowing the law of demand and supply to fix the price ; 
second, the monopoly may decide upon the price at which 
it will sell the product, and then produce only as much 
as can be sold at that price. This is the method usually fol- 
lowed. In either case the supply is Hmited by the will of the 
monopoly and not by the cost of production. In a genuinely 
competitive industry the supply is limited by the cost of pro- 
duction. Producers will stop production rather than sell for 
any considerable time below the cost of production. 



CHAPTER XXIV 

MONEY 

Money a labor-saving invention. One of the greatest of all 
labor-saving devices is money. If one will try to imagine the 
difficulties of carrying on exchange without the use of money, 
that is, by means of direct barter, one will easily understand 
how great a convenience money is. Of course, without the 
use of some kind of money we never could have developed 
our present highly specialized industrial system, under which 
each individual does that for which he is best fitted and 
exchanges his products or services for the products and services 
of other people who are likewise doing that for which they are 
best fitted. But even if we could imagine such an industrial 
system based on barter, the difficulties would seem almost 
insuperable. The tailor who had made a coat and desired 
bread in exchange might find difficulty in finding a baker who 
happened to want a coat ; even if he found such a baker, it 
would be difficult for the tailor to carry home as much bread 
as the coat would be worth. By some kind of credit system, 
of course, the baker could credit him with a large number of 
loaves of bread, to be called for one at a time. The dairyman 
who had milk to sell would, find it difficult to know how to 
collect payment for the very small quantities which he delivered 
to the butcher, the baker, the tailor, etc. These difficulties 
would be so great that in all probability there would be com- 
paratively little exchange. The farmer would have to be his 
own butcher, tailor, and shoemaker. Each household, in fact, 
would have to be almost self-sufficing. 

So important is the function of money in modern industrial 
society that some writers have seen fit to divide systems of 

292 



MONEY 293 

economy into two fundamental types, known as the barter 
economy and the money economy. Certain savage tribes, who 
Hve in a state of primitive communism, get along without much 
exchanging. Their limited commerce with the other tribes 
is carried on by means of barter ; furs and other articles of 
their own production are exchanged for outside products which 
they desire. The introduction of money makes possible a great 
deal of exchanging within the tribe and is supposed to have 
marked one of the epochs in the economic development of 
civilized peoples. 

Various substances which have served as money. Various 
commodities or articles have served the purpose of money. 
The early colonists in America found the Indians using a 
kind of currency known as wampum or bead currency. The 
Hudson Bay Company and other companies that traded with 
the Indians of the interior developed a skin or fur currency, 
in which the skins of various animals were recognized as stan- 
dards of value and exchanged at the ratios agreed upon. In 
ancient times various European peoples accordingly used cattle 
as currency. In the Homeric poems values are frequently 
quoted in terms of cattle. A very amusing and at the same 
time instructive illustration is given in a paper entitled " Rudi- 
mentary Society among Boys," by John Johnson in the Johns 
H^opkins University Studies in History and Political Science, 
2d Series, No. 11. In this primitive boy society, butter was 
used as money. 

BUTTER AND PIE IN BOYS' SOCIETY 

Commonly the primary object of the hunters is to obtain a handsome 
collection of curiosities, and to enjoy the satisfaction of possession along 
with the esteem inspired by success ; but occasionally a boy hunts with a 
purely commercial end in view. I have been told of one who made a prac- 
tice of exchanging all the eggs he found for the allowance of butter given 
to his companions at meals. This latter is dealt out to the boys in approxi- 
mately equal portions of an ounce weight, and is frequently used by them 
as a means of exchange and measure of value. A flying squirrel has been 



294 PRINCIPLES OF POLITICAL ECONOMY 

known to bring fifteen " butters," and a sling, five " butters." The unit is 
subdivided once, the fractional piece being known as the " half-butter" and 
having a purchasing power about equal to that of one cent. Some boys 
who entered upon the manufacture of taffy obtained the needed butter by 
buying it from the rest at the price of two cents for one" butter," payment 
being made, at the option of the seller, either in money or in taffy. 

Their transactions are often so complicated that the boys find it desir- 
able to lessen the number of payments of this novel currency, and they 
employ for this purpose a system of verbally transferring their claims from 
one to another, somewhat as merchants use negotiable notes. Perhaps A 
buys a knife from B for ten " butters." B has an outstanding debt of the 
same amount for marbles, and he transfers to his creditor C his claim 
against A, who pays to C or to anyone else whom C may designate. 

At first glance this use of butter as money seems laughably odd ; but in 
fact it could be easily paralleled by long lists of articles equally far removed 
from the gold, silver, and paper of our own currency, which have yet served 
as money in different parts of the world. The wampum of the early Indians 
is familiar to all readers, and Jevons and Roscher enumerate, among many 
other substances that have been so used, corn, wolfskins, whales' teeth, and 
straw mats. The former of these distinguished authors remarks that " it is 
entirely a question of degree what commodities will in any given state of 
society form the most convenient currency " and our boy-state being in a 
condition where butter served the purpose, its citizens adopted that com- 
modity as their money. 

Professor H. B. Adams added a footnote to the above which 
reads as follows : 

At Phillips Exeter Academy, New Hampshire, in my day, there was. a 
pie currency in vogue among the boys who boarded in Abbot Hall. Pie was 
something of a luxury, for it was furnished by " Burnham," the steward, only 
twice a week. The idea of value in exchange was naturally connected with 
our Saturday and Sunday allowance of pie ; in fact, there was a constant trad- 
ing of different sorts of pie, a boy offering his mince or custard pie of one 
week for the apple or pumpkin pie that was to come the next week. Pie debts 
were, moreover, incurred in a variety of ways, chiefly for services rendered, 
— for example, by one's chum in making the fire on a cold morning, when it 
was not his turn, or by one student aiding another in his lessons, etc. Boys 
would wager their pie sustenance for a week, and sometimes for a month, 
on a match game of ball. These young barbarians, at their ball play, used 
to rival the ancient Germans, who, as Tacitus describes, sometimes staked 
not only their property, but their very freedom in games of chance. What 



MONEY 295 

could be greater recklessness for a hungry boy than to risk his pie for a 
month on the issue of a game of baseball? In ordinary transactions the 
unit of pie value at Exeter was the " piece," which was served us on a special 
plate ; but there were as many standards of value as there were sorts of pie, 
so that in the settlement of a small debt of one or two " pieces," boys some- 
times sought to pay their creditors in pie of an inferior or less marketable 
quality. Poor pie was like trade dollars. Sometimes a creditor would find 
himself with an embarrassment of riches. If his debtors insisted on paying 
off their obligations on one day in one sort of pie, he would be obliged to 
eat up all his perishable substance at once, or to dispose of it at a consider- 
able sacrifice. 

So great is the need for money in a society where there is 
any exchange of desirable articles that almost anything which 
is commonly used and appreciated may serve the purpose of 
money. Among primitive herdsmen, cattle meet the conditions. 
They are universally esteemed and appreciated ; they are famil- 
iar objects whose value is generally understood, and they are 
easily transferable. They lack, however, certain other qualities 
which make modern metallic money convenient. 

Qualities which the money material should possess. Jevons, 
in his '' Money and the Mechanism of Exchange," names seven 
qualities which are desirable in the material of which money is 
made. They are, first, utility and value ; second, portability ; 
third, indestructibility ; fourth, homogeneity ; fifth, divisibility ; 
sixth, stability ; and, seventh, cognrzability. Cattle possess only 
the first, second, and seventh of these qualities, and perhaps to 
a slight degree the sixth. That they are useful to primitive 
herdsmen is rather obvious. They furnish their own porta- 
bility in that they can carry themselves about. They possess 
cognizability because all are familiar with them. There may 
be a certain stability also in their value, though that is by 
no means certain. The skins of animals, used as money by 
hunting tribes, possess the same qualities as cattle, but still 
lack the others which Jevons deems desirable. The '* butters," 
as used in the rudimentary society mentioned above, seem to 
possess everything except indestructibility. 



296 PRINCIPLES OF POLITICAL ECONOMY 

Precious metals especially adapted. It has been found that 
the precious metals, especially gold and silver, possess all these 
qualities in superior degree. If by utility we mean desirability, 
or the capacity to satisfy a desire, there is no doubt that gold 
and silver possess this quality. If we were to take a narrow 
and somewhat puritanical view of utility, we might question this. 
They possess portability because there is considerable value in 
small bulk. This would not be true of the coarser metals. They 
possess indestructibility to a high degree ; they do not corrode 
or rust as iron would. They possess homogeneity ; that is, 
gold of equal purity is essentially alike the world over ; it may 
be easily standardized as to quality, so that one piece of metal 
may be equally desirable with every other piece of the same size 
and standard of fineness. They possess divisibility ; that is, a 
piece of gold or silver may be divided into smaller pieces, and 
each of the smaller pieces will have a value in exact proportion 
to its size. Each may be melted down and recombined into 
larger pieces, and each piece will still have value in proportion 
to its size. This would not be true of diamonds and precious 
stones, though these would possess portability and indestructi- 
bility in high degree. Gold and silver possess stability of value 
in a very peculiar sense. Over long periods of time they will 
fluctuate considerably, but over short periods of time, that is, 
from week to week, from day to day, from hour to hour, they 
will fluctuate very little, whereas other commodities, such as 
farm products, pig iron, and other articles which are dealt in 
largely, fluctuate rapidly over short periods of time. 

Reasons for the stability of gold prices. One reason for the 
stability of the value of the precious metals over short periods 
is that the mass of gold or silver in existence at any one time 
is very large in proportion to the product of any given year. 
The total amount of wheat in existence at the present moment 
has practically all been produced within the last year, or two 
years at the outside. Of the total gold in existence, a very small 
fraction was produced within the last year or two. Suppose 



MONEY 297 

you had a large reservoir of water, fed by a very small pipe. 
If the flow through the small pipe were to vary considerably 
from day to day, it would make very little difference in the total 
quantity of the reservoir ; though if the increase or decrease 
kept up for many years, there might be a considerable change 
in the quantity in the reservoir. This is analogous to the 
case of gold. The total quantity in existence is like the 
quantity of water in the reservoir ; the total annual production 
is like the quantity which flows into the reservoir through a 
very small pipe. The case of wheat is like that of a small 
reservoir fed by a very large pipe. Any change in the quantity 
flowing through the pipe is likely to make a considerable 
change in the quantity in the reservoir. That is to say, a large 
crop of wheat in one year will make a great difference in the 
total quantity available for the world's supply. A crop failure, 
on the other hand, will make a considerable shortage in the 
world's supply. The value of wheat, therefore, fluctuates rapidly 
over short periods of time. Since it would take a number of 
years of excess production of gold to make an appreciable dif- 
ference in the total quantity available for the world's supply, 
gold does not fluctuate much from day to day, from week to 
week, or even from year to year. 

Since most of the transactions in which we use money are 
short-time rather than long-time transactions, it is more impor- 
tant that the money material be stable in value over short periods 
than that it be stable in value over long periods. Occasionally 
we invest our money in something which we expect to last a 
long time ; in such cases we are interested in the stability of 
the value of money over long periods ; but most of our purchases 
are made from day to day. The average business transaction has 
very little relation to long periods of time. This is one of the 
principal reasons why gold and silver serve the purpose of a 
money material better than most other products. In this respect 
gold has proved to be superior even to silver. 

As to cognizability, the superiority of gold and silver over 



298 



PRINCIPLES OF POLITICAL ECONOMY 



other materials is not so great. The expert can always apply 
tests by means of which he can detect spurious coins, but the 
inexpert usually has to depend upon his eyes and his ears and his 
sense of touch. But there are not many other substances which 
cannot be adulterated or of which counterfeits may not be made. 
Gold and silver are not particularly wanting in cognizability, 
though they are not preeminently superior in this respect. 

For certain minor coins, however, neither gold nor silver is 
well adapted. There is so much value in such small bulk in 
gold, for example, that one would need a magnifying glass and 
tools more delicate than the human fingers to handle gold coins 
of the value of our five-cent pieces and one-cent pieces. Mere 
physical convenience requires a coarser metal for these small 
values. Even the gold dollar, which was once coined in the 
United States, proved too small and inconvenient, and its coinage 
was therefore suspended. The forms of money now in existence 
in the United States are indicated in the following outline : 



KINDS OF MONEY IN THE UNITED STATES 



CoiN<! 



Paper 



Double eagle 

Eagle 

Half eagle 

Quarter eagle 

Dollar 

Half dollar 

Quarter 

Dime 

Five-cent piece 

One-cent piece 

Gold certificates 

Silver certificates 

Treasury notes 

United States notes (greenbacks) 

National bank notes 

Federal Reserve notes 

Federal Reserve bank notes 



Gold 



Silver ^ 



Nickel : 
Bronze 



MONEY 299 

The coins are sufficiently familiar to require no description. 
Their differences appeal readily to the eye. It is noticeable, 
however, that comparatively few people note carefully the dif- 
ferent kinds of paper currency. Anyone who has coins in his 
pocket can tell you instantly to which class each coin belongs. 
Comparatively few people, however, can tell you about the 
different pieces of paper money in their pockets. 

The first three forms of paper currency mentioned in the 
above outline may be called warehouse receipts. For the con- 
venience of the people the Federal Treasury issues these 
receipts in return for deposits of other forms of money. If, for 
example, one has a large quantity of gold or silver coin, and 
desires something more convenient, he may deposit the coin 
with the Secretary of the Treasury and receive in return gold 
or silver certificates. These merely certify that the coin has 
been deposited in the Treasury. These certificates then circu- 
late as money. Gold certificates are issued against deposits of 
gold, and silver certificates against deposits of silver. A silver 
certificate, for example, reads : '' This certifies that there have 
been deposited in the Treasury of the United States of 

America silver dollars, payable to the bearer on demand." 

The Treasury notes were issued in the purchase of silver 
bullion under an act authorizing such purchase. They have 
almost disappeared from circulation, having been redeemed by 
the coinage of the bullion for the purchase of which they were 
issued. The United States note, popularly known as the green- 
back, is issued by the Federal government as pure credit cur- 
rency. It has on its face, among other things, " The United 

States of America will pay to the bearer dollars." The 

issue of these notes was authorized by act of Congress during 
the Civil War as a means of financing the war ; that is, as 
a means of paying the obligations of the government. The 
amount then authorized, with only a slight reduction, has been 
kept in circulation ever since. The national bank notes are 
technically known as national currency. They are secured by 



300 PRINCIPLES OF POLITICAL ECONOMY 

United States bonds or other securities deposited with the 
Secretary of the Treasury. They are issued to the bank mak- 
ing the deposit, and bear on their face the name of the bank. 
It is the bank, however, which agrees to pay, rather than 
the government ; the government merely stands back of the 
bank. A bank note has on its face, among other things, '' The 

National Bank of will pay to the bearer on 

demand dollars." 

The Federal Reserve notes are issued to the Federal Reserve 
banks by an agent of the United States Treasury. They 
are sent to the member banks by the Federal Reserve banks 
in return for deposits of commercial paper, and are then put 
into circulation by the local, or member, banks. The Federal 
Reserve bank notes are used as yet only to a small extent. 
They are issued to the Federal Reserve banks by the United 
States Treasury in return for deposits of government bonds, 
being in all essentials like the national bank notes which they 
are intended to replace. 

Standard money. Among all these forms of money there is 
one which is known as standard money, — that is, gold coin. 
The value of the gold coin depends on the value of the mate- 
rial of which it is made. So long as the present policy of the 
government is maintained, the value of a gold coin can never 
vary appreciably from that of the metal which it contains. One 
reason for this is that the government will undertake to coin 
all the gold that is brought to the mint and to charge nothing 
for the work of coining, except the value of the alloy which is 
put in. Since this alloy also has some value, this virtually 
means that if you bring to the mint not only the gold but also 
the other materials which go into the coin, in the proper ratio, 
the government does the work of coining free of charge ; you 
merely supply the raw material. When, therefore, there is even 
the slightest tendency for the value of coin to rise above that 
of bulHon, men will anticipate this tendency by taking bullion 
to the mint. Since coin is easily melted down into bullion, if 



MONEY 301 

bullion showed the slightest tendency to exceed coin in value, 
that would be anticipated by melting coin down into bullion. 
These two processes make it practically certain that, so long as 
the government can maintain its policy, gold coin and bullion 
will be identical in value. 

Token currency. Gold is the only form of money now in 
circulation in the country which is actually standard money. 
The exchange value of a silver coin is much greater than that of 
the metal of which it is made. The same is true of the nickel 
and bronze, and conspicuously true of the paper. The general 
name applied to these other forms of money is token airrency. 
They are accepted in exchange not because of the value of the 
material of which they are made but because they stand as 
tokens, or representatives, of some other form of value. With 
the currency certificates, gold certificates, and silver certificates 
this is perfectly plain. The certificates are merely tokens rep- 
resenting that which has been deposited. With the bank notes 
it is equally plain, because the bank agrees to pay other forms 
of money. Even with the silver coins, while there is no 
direct agreement to exchange gold for them, the practice pre- 
vails. In addition to this, and quite as important also, is the 
fact that the government itself receives all these forms of 
currency in payment of obligations to itself. Thus, you can 
pay your taxes, you can buy postage stamps, you can pay cus- 
toms duties, and any other obligation which you owe to the 
government, in these other forms of currency. Technically the 
United States notes, or greenbacks, are not legal tender for 
payment of customs dues, but as a matter of fact they are 
receivable. By legal-tender currency is meant any currency 
with which you can pay a debt and compel the creditor to 
take that or nothing. You can offer, or '' tender," him the 
amount of the debt, and he cannot demand some other form of 
currency. Most of our forms of currency are legal tender for 
any amount, except our smaller coins, which are legal tender 
for only limited amounts. They thus represent in that indirect 



302 PRINCIPLES OF POLITICAL ECONOMY 

sense a real value, or they serve these valuable purposes for 
their possessors. In the third place, some of them are declared 
to be legal tender ; that is, you can pay your debt, not only to 
the government but to anyone else to whom you owe money, 
by offering various forms of token currency as well as by 
offering gold. 

The question has frequently been raised. Why use such ex- 
pensive materials as gold and silver for money ? Would not 
some cheap substance, such as paper or aluminum, serve equally 
well ? Many long and heated controversies have been waged 
over this question. The so-called ''hard-money" school have 
taken the position that the government cannot make money, 
it can only stamp money. The stamp merely serves as a certifi- 
cate of its weight and fineness ; the market itself must then de- 
termine its value. The '' soft-money" school, on the contrary, 
have pointed to many historic instances in which cheap ma- 
terials have actually served as money and circulated at a value 
which bore no relation to the value of the substance of which 
it was made. The truth seems to be summarized as follows : 
I. Long-established customs, in a country such, for example, 
as China, where custom rules supreme, may enable a kind of 
money to circulate at a customary value regardless of the 
commercial value of the material of which it is made. 2. A 
government which is in the habit of using a great deal of 
compulsion, as in Germany, over a people who are in the 
habit of submitting to authority and compulsion, may by its 
own decree cause money to circulate at legally established 
rates without regard to the commercial value of the substance 
of which it is made. But a government which is not in the 
habit of exercising a great deal of compulsion, and a people 
who are not in the habit of submitting to it, have to rely 
mainly upon voluntary agreement among individuals in most 
of the relations of life. 3. Where voluntary agreement rather 
than government compulsion is mainly depended upon, it has 
hitherto proved impossible to get people to voluntarily agree 



MONEY 303 

upon any substance as the material for standard money except 
something which had a value as raw material commensurate 
to its value as money. 4. Cheaper substances may, however, 
be used in limited quantities as token money even in liberal 
countries where everything is done by voluntary agreement, 
{a) when standard money will be exchanged for it ; {b) when 
the government will accept it in payment to itself ; {c) in small 
quantities when the government exercises its authority by com- 
pelling a creditor to accept it in payment of a debt when 
offered by a debtor. This, however, is an exercise of compul- 
sion, but it is one to which many even of the liberal govern- 
ments resort. 



CHAPTER XXV 
BANKING 

Need of institutions to deal in credit. In view of the fact 
that credit suppUes so important a part of our circulating me- 
dium, it is natural that a special class of institutions should 
arise which deal primarily with credit. These institutions are 
called banks. The term bank originally meant the bench 
before which the money changer sat, with his coins stacked 
up before him. When he failed in business, his bench was 
broken up, hence the word bankrupt. 

Receiving deposits and making loans. The original busi- 
ness of the bank was ostensibly to deal in money, but out of 
this has grown the business of dealing in credit. Lombard 
Street became the banking center of London, from the fact 
that it was occupied by goldsmiths frohi Lombardy. They 
had to have safes in which to store their valuables. During 
the turbulent times of the sixteenth and seventeenth centuries 
certain worthy Londoners used to deposit not only their valu- 
ables but their money with these goldsmiths for safe-keeping. 
Having so much money on hand, the goldsmiths began gradu- 
ally to lend out small sums, always taking precautions to keep 
enough on hand to meet the demands of depositors whenever 
they were presented. This business of receiving deposits and 
making loans, which is the essence of all banking, eventually 
became more lucrative than the trade of the goldsmith. More 
and more, therefore, they gave up their original trade and be- 
came dealers in money and credit ; that is, receiving deposits 
and making loans. These two things are still the fundamental 
purposes of a bank. The depositors came to recognize the 

304 



BANKING 305 

legitimacy of this business, and it became respectable and 
well established, and is now one of the most important of all 
forms of business. 

Making money more active. While, as stated above, the 
essential work of a bank is to receive deposits and make loans, 
by doing these things it performs certain important functions 
in the national economy. One of these functions is to take 
money which would otherwise have remained inactive and put 
it to work, thus making it active. The individual who has a 
fund of purchasing power which he does not care to invest for 
the time being may deposit it with a banker ; someone else 
who has an opportunity for investment, that is, for the active 
use of capital, may go to the banker and borrow it. The 
banker is therefore the middleman who stands between the 
one who has money to spare for which he has no immediate 
need and the one who has a need for capital which he does 
not possess. Without the banker these two men might have 
difficulty in finding each other. The banker at least saves 
them time and trouble. It is very much the same function as 
that performed by any other middleman. The producer of 
material products does not have time to peddle his goods 
among consumers, and the consumer does not have time to 
search for a producer who has for sale exactly what he wants 
to buy. Both go to the merchant, the one to sell his sur- 
plus, the other to buy his supplies. The merchant saves both 
of them the trouble and earns an income in return for the 
service which he performs. 

Savings banks. The depositor may prefer to leave his money 
on deposit for a long time or for a stated time, or he may 
prefer to deposit it on condition that he may withdraw it at any 
moment when it suits his convenience to do so. The former 
class of deposits are commonly called savings deposits, and the 
latter, deposits subject to check. The savings banks are a 
special class which receive savings deposits, whereas the 
ordinary commercial bank receives deposits subject to check. 



3o6 PRINCIPLES OF POLITICAL ECONOMY 

Origin of the bank check. Originally, when a depositor in 
a bank wished to make a payment to another person, it was 
necessary for the depositor to withdraw his money from deposit 
and hand it to the payee. A little later the custom grew up 
of going in person to the bank and authorizing the bank to 
transfer a certain sum from the payer's to the payee's account. 
The payee could then draw out the money as he needed it. 
From this it was an easy step to the custom of giving the bank 
a written order to pay a certain sum to another person. This 
written order became known as a bank check. These checks 
proved so convenient that they became one of the principal 
means of making payments. A, who wishes to pay money to 
B, merely hands a check to B, — a written order on the bank. 
B may then withdraw the money, or he may deposit the check 
and have the sum transferred from the payer's account and 
credited to his own account, or he may indorse the check and 
pass it on to a third person. This third person may pass it 
on to a fourth, and so on almost indefinitely. Sooner or later, 
however, some individual who receives the check will deposit 
it with his own bank. If it happens to be the same bank on 
which it was originally drawn, the matter of transferring the 
account is very simple. If it happens to be another bank, and 
there happen to be a great many banks in the same business 
center, each one receiving, in the course of the day's busi- 
ness, a great number of checks on all the others, a somewhat 
complicated problem is sure to arise. This is the problem of 
bank clearings. A bank draft is merely a check on one bank 
drawn by another bank. A certified check is a private check to 
which the bank on which it is drawn certifies, or the payment 
of which it guarantees. 

The clearing house. The vast increase in the use of bank 
checks in the making of payments long ago created the neces- 
sity for a special institution known as the clearing house. At 
the close of each day's business every bank in a large commer- 
cial center finds itself in possession of a number of checks on 



BANKING 307 

each of the other banks. Originally messengers were sent the 
rounds, carrying bundles of checks. This was both a cumber- 
some and an expensive process. In order to save time and 
shoe leather these messengers formed the habit of meeting at 
certain places at certain hours and exchanging their bundles 
of checks, keeping records of all such transactions. By this 
simple process the messenger from pne bank would receive all 
the checks on his own bank from the messengers from the 
other banks, and at the same time he would deliver to the 
messengers from each of the other banks the checks on their 
respective banks deposited with his bank. 

From this it was an easy transition to the organization of a 
regular clearing house, which eventually became the heart of 
the whole financial district. The late Charles F. Dunbar 
describes the process as follows : ^ 

This medium of payment acquires great perfection wherever the Clearing- 
House system is adopted. Under this system there is a daily meeting of 
clerks representing all the banks carrying on business at any common center. 
Every bank there turns in at a central office all the checks and cash demands 
which it holds against others, and is credited therewith, and is also 
charged with all checks and demands brought against it in like manner by 
others. The checks and demands which have thus been credited to and 
charged against each bank are then summed up, and the balance found to be 
owed by or due to each bank, as the case may be, it then pays to or receives 
from the central office in money. By this means a great mass of trans- 
actions, which would otherwise require a series of demands by each bank 
upon every other in the same place, are settled at once, and the transporta- 
tion of large sums in cash from one bank to another is to a great extent 
dispensed with. 

The bank deposit, circulated by means of checks, is the most convenient 
medium of payment yet devised. A stroke of the pen transfers it in what- 
ever amount is needed for the largest transaction, and this transfer instantly 
becomes the basis for fresh operations, with as complete security against 
accidental loss as can be imagined. In the strict economic sense this 
medium no doubt has rapidity of circulation in a high degree, while in the 
sense of actual activity of movement in a given time it far outstrips money 

1 The Theory and History of Banking. Third edition, enlarged by Oliver 
M. W. Sprague, G- P. Putnam's Sons, New York and London, 1917. 



308 PRINCIPLES OF POLITICAL ECONOMY 

or notes, and has been well said to be the most volatile of all the mediums 
of exchange. Of the entire circulating medium of this country, it forms 
incomparably the greatest, although the least considered, part. Depending 
for its efficiency solely upon convention, it for the most part eludes the 
regulations which legislatures so industriously enforce upon the other con- 
stituents of the currency. Indeed, beyond the requirement of a minimum 
reserve made by the law of the United States, and of most of the several 
states, we may say that the subject is not touched by legislation, in this 
country or elsewhere. The necessity for payment in specie or legal-tender 
paper upon demand, the chief safeguard of value, is the result of general 
provisions for the payment of debts of any kind. And the chief assurance 
against excessive expansion on the part of any single bank or banker is 
given by the certain demand for prompt and frequent settlement occasioned 
by the voluntary establishment of the clearing house, or by the habits of 
the community, but not by. law. 

Since the above was written, the Federal Reserve Act has 
been passed and the Federal Reserve system put into operation 
in the United States. Dunbar's description of the essential 
methods of clearing still applies, but most of the bank clearings 
in this country are now done through the Federal Reserve 
banks. The clearing house is essentially a banker s bank, where 
banks make their payments to and collect their obligations from 
one another very much as private individuals who do business 
with the same bank make their payments to and collect their 
obligations from one another. The Federal Reserve banks are 
now in a peculiar sense fitted to act as the bank for the member 
banks, thus taking the place of the clearing house. 

When you make a payment to someone in another city, 
with whom you have business relations or who knows you 
and your solvency, a very convenient method is to send him 
a check on your own local bank. He will then present your 
check to his own bank for collection. His bank will usually 
credit him at once with the amount for which the check is 
drawn, and then send the check through a regular groove. 
Usually it will send the check to the P'ederal Reserve bank of 
its district, and this Federal Reserve bank will send it either to 
the bank on which it is drawn or, if that bank is in another 



BANKING 309 

district, to the Federal Reserve bank of that district, which will, 
in turn, send it to the bank on which it is drawn. When the 
check gets back to you, you can trace its course by the indorse- 
ments on its back. Sometimes the banks find it necessary to 
charge a small fee for collecting a check of this kind. 

Bank checks do not circulate quite so freely among private 
individuals as money, because each check must be indorsed by 
each person through whose hands it passes. Therefore a 
check will be accepted only from a person whose signature is 
known to be genuine. Since, however, paper money circulates 
without indorsement, one will accept it from a stranger or a 
known rogue unless one has reasons for suspecting the money 
to be counterfeit. 

Bank notes. Certain banks, such as national banks, have 
been permitted to perform the special function of issuing bank 
notes and thus providing a circulating medium which answers 
the purpose of money if it is not itself a form of money. 
These notes have circulated from hand to hand in all respects 
as money. They differ from the notes of an ordinary individual 
in that they pass from hand to hand without indorsement. 
The note of an individual may circulate to a certain extent, 
but the laws and customs of business require that it be in- 
dorsed by everyone through whose hands it passes. In that 
important respect the private note differs from money. It is 
the custom for a modern bank note to pass from hand to hand 
in full payment of all obligations, without indorsement and 
without any regard to the honesty or credit of the individual 
who offers it in purchase of a commodity or in payment of a debt. 

The Bank of England. In some historic cases this custom 
of issuing notes has grown up without the authority of the 
government and without any special help from the government, 
precisely as the custom of receiving deposits and making loans 
has grown up. In most modern countries, however, where 
bank notes are allowed to circulate, they are not only authorized 
by law but very carefully supervised and safeguarded. The 



3IO PRINCIPLES OF POLITICAL ECONOMY 

Bank of England, for example, occupies a position with respect 
to the British government somewhat similar to the position 
which an ordinary bank in this country occupies with respect 
to one of its largest customers. The British government 
maintains no separate treasury of its own, but deposits any 
surplus money which it may have with the bank, just as a 
private firm deposits its surplus money with its own bank. 
The British government makes its payments by orders on the 
bank, very much as a private firm would make its payments 
by check on its own bank. When the British government 
desires to borrow money, except in extraordinary cases, it has 
generally borrowed through its own bank, the bank merely 
serving as the agent of the government in this respect. 

In return for various services which the bank has performed, 
it has been permitted to issue bank notes up to a certain extent, 
1 7; 7 7 5,000 pounds, secured by debts of the government to the 
bank, and to keep them in circulation very much as other forms 
of money are circulated. Beyond this quantity it was permitted 
to issue notes only under the most rigid restrictions. All its 
additional notes, in normal times, are virtually warehouse re- 
ceipts similar to our gold and silver certificates. That is to 
say, for every note issued an equivalent in gold has had to be 
deposited with the bank. These notes were merely conven- 
iences to the general public. An individual who did not wish 
to carry a large quantity of gold could take it to the bank, 
deposit it, and get notes instead. The notes are issued only 
in large denominations. Since the outbreak of the present 
world war the restrictions upon the issue of notes have been 
removed, so that, for the time being, the Bank of England 
is permitted to issue notes at will. 

The old bank of the United States. In this country the old 
bank of the United States was chartered in 1791 for twenty 
years. A new charter was refused in 181 1, and it went out of 
existence. A second bank, similar to the first, was chartered 
in 1 8 16, to run for twenty years. Both these banks served 



BANKING 311 

much the same purpose as the Bank of England ; that is, the 
United States Bank was in a sense the banker of the Federal 
government. It went out of existence, however, in 1836, hav- 
ing failed to secure a new charter, partly through the opposition 
of President Jackson. 

The national banking system. In 1863 the foundation of 
our present national banking system was laid, and a series 
of national banks was created, partly as a means of making a 
market for the bonds which the Federal government was offer- 
ing for sale in order to get money with which to carry on the 
Civil War. Any bank chartered under this act was permitted 
to deposit bonds of the United States with the Secretary of 
the Treasury, and in return for these deposits it was permitted 
to circulate bank notes up to 90 per cent of the value of 
the bonds deposited. Thus, if the bank failed, the government 
had possession of enough of its property to redeem all the notes 
which it had issued. I^a sense, the bank had pawned valuable 
property (that is, government bonds), and received a kind of 
pawn check in return. These ''checks," called bank notes, it 
was permitted to circulate. This is essentially the characteristic 
of our bank notes to the present day. Subsequent acts have 
made some changes in the system, particularly the act of 1908, 
which permits a national bank to deposit certain other securities 
besides United States bonds as a basis for its note circulation. 

The Federal Reserve system. The most important piece of 
banking legislation in this country since the National Bank 
Act of 1863 was the Federal Reserve Act of 191 3. Under 
this act there was created under the Treasury Department of 
the United States a Federal Reserve board consisting of five 
members, besides the Secretary of the Treasury and the Comp- 
troller of the Currency, charged with the general administration 
of the national banking system. The country was then divided 
into twelve districts, and within each district a city was selected, 
to be called a Federal Reserve city. The cities chosen were 
Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, 



312 PRINCIPLES OF POLITICAL ECONOMY 

Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and 
San Francisco. In each of these cities was organized a F'ederal 
Reserve bank. This bank was to be the central bank of the 
Federal Reserve system in the district within which it was 
located. All the national banks, and all the state banks which 
wished to become national banks, by coming in under the 
Federal Reserve system were to become member banks and in 
a sense tributary to the Federal Reserve bank. They have a 
voice in the control of the Federal Reserve bank of their own 
district. Each member bank is required to subscribe to the 
capital of, and to keep all of its required reserves on deposit 
with, the Federal Reserve bank of its district. The Federal 
Reserve bank thus becomes, in a sense, the bank of the member 
banks of its own district. It does no business directly with pri- 
vate individuals, aside from the purchase of bills of exchange 
in the open market. The Federal Reserve banks themselves 
carry on their clearing through a special If-anch of the Federal 
Reserve board in Washington. This may be called the bank 
of the Federal Reserve banks. 

The general purposes of the Federal Reserve system may 
be summarized under three heads : first, the provision of a 
general and well-organized market for the selling of commercial 
paper ; second, the pooling of the reserves of existing banks ; 
third, the provision of an elastic currency. The first and 
second of these purposes are provided for partly by the require- 
ment that each member bank shall keep a part of its funds 
on deposit with the Federal Reserve bank of its district. In 
return for this the Federal Reserve bank is to take commer- 
cial paper, that is, notes and other promises to pay money to 
the bank, and send it money instead. Thus, an individual who 
wishes to borrow money from the bank gives it his own per- 
sonal note, properly secured. When the bank has a large 
batch of these notes and other obligations to pay money, and 
needs more cash, it can indorse these notes and '' sell " them 
for cash to the Federal Reserve bank. 



BANKING 313 

The first two purposes are partly provided for by the organi- 
zation of all the clearings among member banks through 
the Federal Reserve banks and among the Federal Reserve 
banks through the Federal Reserve board. 

The purpose of providing an elastic currency is carried out 
in the plan for the issuing of bank notes. Two classes of notes 
are provided for under the system : first, Federal Reserve 
notes, and, second, Federal Reserve bank notes. The Federal 
Reserve notes are issued to member banks by the Federal Re- 
serve banks in return for securities of various kinds. For ex- 
ample, when a member bank sends in a batch of personal notes 
and other obligations and asks for cash, it may get its cash in 
the form of Federal Reserve notes. These notes are issued to 
the Federal Reserve banks themselves by a government official 
known as a Federal Reserve agent. Over a billion and a half 
of these notes have been issued, and it is expected that they 
will increase. 

Not much use has been made as yet (19 18) of the Federal 
Reserve bank notes. They are based upon government bonds 
which are deposited with the Treasury Department, just as is 
the case with national bank notes. 

It is the Federal Reserve notes, rather than the Federal Reserve 
bank notes, which give elasticity to the currency. When busi- 
ness is active and the member banks are doing a large lending 
business, that is, lending a great deal of money to individuals 
and firms, they will, of course, have received as security many 
personal notes and other obligations. By sending them in large 
batches to the Federal Reserve banks they get large quantities 
of Federal Reserve notes, which they proceed to lend out, receiv- 
ing other notes and obligations in turn. By repeating this 
process they put large quantities into circulation when money is 
needed or demanded. When the lending business is slack, that 
is, when there is not much demand for money, fewer of these 
notes are put into circulation. Thus the supply automatically 
adjusts itself to the demand. 



314 PRINCIPLES OF POLITICAL ECONOMY 

A national bank in this country is any bank which is char- 
tered under Federal law as distinguished from state law. With 
the exception of the first and second banks of the United 
States, the banks chartered under the National Bank Act, re- 
ferred to above, and those organized under the present Federal 
Reserve system, all banks in the United States are chartered 
under state laws and are therefore state banks. Before the 
Civil War many state banks issued bank notes. In many of 
the states the regulation and inspection were very inadequate, 
and the state banks were permitted to issue notes which they 
could not redeem ; that is, for which they could not exchange 
lawful money when they were presented. These came to be 
known as wildcat banks. Since the establishment of the 
national banking system during the Civil War the privilege of 
issuing bank notes has been reserved for banks chartered 
and controlled by the Federal government, — that is, to 
national banks. 

Agricultural credit. The business of agriculture has been 
the slowest of all to make a large use of credit. One reason 
has been that there has been no machinery designed to provide 
the farmers with the kind of credit which they have needed, as 
the ordinary banks have provided the merchants and manufac- 
turers with the kind which they have needed. The farmer 
needs comparatively little short-time credit, as the merchant 
and manufacturer understand that term. The bank which does 
a regular check and deposit business, whose deposits are con- 
tinually being withdrawn and replenished, must keep its assets 
in liquid form. Farm mortgages are notoriously hard to dis- 
pose of, and no commercial bank would feel safe if it loaned a 
large proportion of its deposits out on that kind of security. 

Even what the farmer calls short-time credit is too long for 
the average bank. The farmer can seldom use credit for less 
than three months, and he is more likely to need it for six, 
nine, or twelve months, whereas the city borrowers generally 
borrow for shorter periods, such as thirty, sixty, or ninety days. 



BANKING 



315 



The farmer's chief need, however, is for long-time, or mort- 
gage, credit rather than for short-time, or personal, credit. In 
the purchase of a farm, in the making of durable improve- 
ments, or even in the stocking or equipping of the farm, con- 
siderable sums of money are required. If he borrows for 
these purposes, he can scarcely hope to pay off his debt inside 
of a term of years. The mortgage is the only satisfactory form 
of security in cases of this kind. 

A very important development of our banking system, de- 
signed to extend credit facilities to the farmers of the country, 
was begun by the act of 19 16, inaugurating our farm land bank 
system. The general organization of this system resembled 




I Farm EK I |Farmer| IFarmerJ | Farmer j | Farmer} 



that of the Federal Reserve system. It is presided over by a 
central body known as the Farm Loan Board. The country was 
divided into twelve districts, and in each district a city was se- 
lected as a headquarters for the Farm Land Bank. The Farm 
Land Bank was to operate throughout its own district in the 
organization of local Farm Loan Associations ; it was to handle 
the securities and to discount mortgages sent to it from the 
Farm Loan Associations in its district. 

Each Farm Loan Association is to be an association of farm 
owners, or those about to become owners, who desire to borrow 
money on the security of a farm mortgage. The individual 
farmer is to deal only with his local association. A group of 
farmers form themselves, according to specified rules and plans, 
into a Farm Loan Association. Each one who wishes to borrow 



3i6 PRINCIPLES OF POLITICAL ECONOMY 

money gives a mortgage on his farm to the association. The 
association then indorses the mortgages received from its own 
members and sends them to the Farm Land Bank of the district. 
The Farm Land Bank then advances the money to the Farm Loan 
Association, and the association in turn advances the money to 
each of the farmers. 

When the Farm Land Bank has a sufficient number of mort- 
gages transferred to it in this way, it may deposit these mort- 
gages with a custodian appointed by the Farm Loan Board, and 
it is then empowered to issue bonds to an equal amount and 
offer these bonds for sale to the general investing public. With 
the money received as the proceeds of these sales of bonds it 
may buy more mortgages from the local Farm Loan Associations 
within the district. On the basis of these new mortgages it 
may issue more bonds, and so on till its outstanding bonds 
equal twenty times the capital of the Farm Land Bank. 

Authority as shown in the chart proceeds from the Farm Loan 
Board to the Farm Land Bank, and from the Farm Land Bank 
to the Farm Loan Association. The mortgages are passed in the 
opposite direction, — first, from the individual farmer to the 
Farm Loan Association, then from the Farm Loan Association 
to the Farm Land Bank, and, finally, from the Farm Land Bank 
to the Farm Loan Board. The money proceeds, in exchange for 
bonds, from the individual investor, who is a part of the gen- 
eral public, to the Farm Land Bank, which in turn forwards 
it, in exchange for mortgages, to the Farm Loan Association, 
which finally passes it on, in exchange for mortgages, to the 
individual farmers. 

The fundamental advantage of this system is that it greatly 
increases the supply of loanable capital which is available for 
the farmer borrowers. When the farmer has to borrow directly 
from the general public, giving a mortgage as security, only a 
small fraction of the people who have money to lend or invest 
are in a position to take his mortgage. Each mortgage requires 
close inspection, not only as to the value of the property 



BANKING 317 

mortgaged, but also as to the laws of the state, the form in 
which the mortgage is drawn, and a number of minor details. 
Only a few are expert enough to make this inspection. The 
inexpert investors must look for investments which do not re- 
quire such close inspection. But under this new system anyone, 
however inexpert, who has a little money to lend or invest can 
as safely buy a bond of a Farm Land Bank as any other form of 
security. This will put at the disposition of the farmer borrower 
a vast fund of loanable capital from which he was formerly shut 
off completely. 



CHAPTER XXVI 

MARKETING 

One very important topic under the general subject of 
exchange is that of marketing. This has to do with the 
actual process of finding buyers for that which has been pro- 
duced, or, in more abstract terms, with the bridging of the 
gap which separates producer and consumer. 

Essentials of successful marketing. There are four essentials 
to the easy and successful marketing of any commodity. In the 
first place, it must be of good quality, that is, of the quality 
which is desired by the buyers. In the second place, the product 
must be so graded or standardized that the buyer can buy it 
without inspection. The buyer of a farm product, for example, 
who must inspect it in order to test its quality, must necessarily 
waste a great deal of time and energy in the process. Time 
and energy are expensive. In order to save his time and do 
a large business at the minimum labor cost, he must insist on 
buying such products as have been graded and standardized 
so that he can order by grade and without inspection. In the 
third place, the product must be in some way stamped or 
branded, and the stamp or brand must be safeguarded as care- 
fully as a banker would safeguard his signature or the govern- 
ment its seal. Any individual or association which permits 
inferior or ungraded products to go under its stamp or brand 
must eventually suffer loss ; the reputation of the stamp or 
brand will be destroyed, and buyers will thereafter place no 
confidence in it. In the fourth place, the public must be edu- 
cated as to the meaning of the grades and standards, and the 
stamps, brands, or trade-marks, in order that it may be aware 
of the desirability of buying without inspection, and of the 
possibilities in that direction. 

318 



MARKETING 319 

Unless the producers themselves will undertake to do these 
four things, the consumers will never consent to buy any large 
proportion of the product directly. The consumer will insist 
on saving his time, even at the loss of some money in the 
way of higher prices. The producer will not be able to get 
the advantage of those higher prices, and there will be a con- 
siderable spread between the price which the producer gets and 
that which the consumer pays. This spread will be absorbed 
by those middlemen who buy the ungraded, nondescript prod- 
ucts directly from the producers, in a form in which the con- 
sumers do not generally want them at all, and then put those 
products into such forms as will satisfy the consumers. 

Special difficulties in marketing farm produce. The mar- 
keting of farm products is the least organized and probably 
the least efficient part of our whole marketing system. This is 
probably inherent in the very nature of agricultural production. 
From the standpoint of production the advantages appear to 
be very definitely on the side of the small producer. A small 
farmer, being able to produce more economically than the 
large farmer, continues to hold the field. But he is at a pecul- 
iar disadvantage in the marketing of his own produce. Even 
if he were able to grade and standardize his produce, the diffi- 
culty of educating the public to the meaning of his brand 
would be insuperable. He has so little to sell that the cost of 
advertising would eat up the profits. To put it in another way, 
the public would soon become bewildered if every one of the 
millions of farmers of this country tried to create a special 
market for his own individual products. 

From the standpoint of marketing, the bonanza farmer has 
a great advantage. In some cases, that is, in the production 
of certain agricultural specialties, such as fancy fruits and 
vegetables, breeding animals, and race horses, this advantage 
in marketing is so great as to more than balance the disad- 
vantage in production. This is probably due to the nature of an 
agricultural specialty. The great staple crops, on which the 



320 PRINCIPLES OF POLITICAL ECONOMY 

world must in the main be fed, are not so difficult to market 
as are specialties. In the production of these great staple crops 
the advantage will remain probably on the side of those who 
can reduce the cost of production to the minimum, rather than 
on the side of those who can market most effectively. But in 
the case of agricultural specialties, where marketing is more 
difficult, the advantage will probably remain on the side of 
those who can market effectively rather than on the side of 
those who can reduce the cost of production to the lowest 
point. The large producing unit can do its own grading and 
standardizing, can adopt its own trade-mark or brand, and can 
advertise more effectively than the small producing unit. This 
will probably keep the production of agricultural specialties in 
the hands of large producers, at least for some time to come. 
The only chance which the small farmer will have in the field 
of agricultural specialties is through cooperation. 

Cooperative marketing. It will be observed that there is 
very little cooperative farming in this country or anywhere else. 
There is a great deal of cooperation among farmers, especially 
in European countries ; but this cooperation is really cooperative 
marketing. The farm as a productive unit is managed inde- 
pendently and separately, but the products of a great many farms 
are marketed cooperatively. This gives the double advantage of 
economic production in small units and efficient marketing in 
large units. On the whole, it looks like an ideal arrangement. 

This distinction between production and marketing will 
throw light on certain problems in business organization out- 
side of agriculture. The so-called trust is primarily a market- 
ing organization rather than a producing organization. A large 
number of independent companies, operating independent fac- 
tories, join together for a common management. This may 
result in some reorganization of the work of production, but in 
the main it works a reorganization in the methods of selling the 
product, of buying the raw materials, of hiring labor, or of bar- 
gaining for transportation. It is probable that some economies 



MARKETING 32 1 

are introduced into production ; but even if no economies 
of production were secured, the trust might succeed by reason 
of its superior bargaining power. If, by reason of its magnitude 
and the perfection of its organization, it can bargain for better 
transportation rates than independent producers can get, it may 
beat them out in competition. In the earHer days of the trust 
movement this was an important factor in its success. Again, 
if the trust can get control of a source of raw material, or, 
through its organization, can bargain to better advantage for 
its raw materials, it likewise has an advantage over its inde- 
pendent competitors. Or if it can secure its labor on better 
terms, it will have another advantage. In the main, however, 
its chief advantage lies in its superior facilities in marketing. 
Having its selling organization highly perfected and its agents 
everywhere, it can take advantage of every possible fluctuation 
in demand, and thus secure a legitimate advantage. Unfortu- 
nately it is also able to manipulate the market, to discriminate 
in prices between localities as well as between persons, and 
thus to gain an illegitimate advantage over its independent rivals. 
The advantages of the huge department store are likewise in the 
field of bargaining rather than in the field of productive service. 
Social advantages of a good marketing system. There is 
little danger that any farmers' association will ever reach a 
magnitude or a perfection of organization which will permit it 
to discriminate in prices against certain localities or individuals. 
There is therefore little danger that it will ever be able to 
secure an illegitimate advantage. It may, however, reach a 
magnitude and a perfection of organization which will enable 
it to take advantage of whatever fluctuations the market shows 
and thus gain a legitimate profit. If, for example, in an un- 
organized market, too much of a certain kind of produce should 
be sent to one city, some of it would either go to waste or be 
very ineffectively consumed ; that is, be used for unimportant 
purposes. If, at the same time, too little were sent to another 
locality, there its marginal utility would be high. The total 



322 PRINCIPLES OF POLITICAL ECONOMY 

supply of the commodity would yield more satisfaction if it 
were redistributed. A community which was oversupplied would 
lose very little by having its supply slightly reduced ; whereas 
a community which was undersupplied would gain considerably 
by having its supply slightly increased. There would thus be 
a net gain to society through the redistribution. A large and 
efficient selling organization can frequently prevent such a bad 
geographical distribution of produce, and thus avoid loss to the 
community. In so far as it achieves this result, it is rendering 
a valuable service to the nation and is entitled to profit by it. 

Standardization a government function. There may be 
some questions as to what part the government can properly 
take in the improvement of marketing methods and facilities. 
Whatever differences of opinion may exist with respect to 
other functions of government, little is said, or can be said, 
against coining money and fixing the standards of weights and 
measures. Though these two functions are grouped together 
in the same clause of our Federal Constitution, it is doubtful 
if it is generally realized how close is the logical connection 
between them. Both result in great economy of effort in the 
transfer of goods. The economy involved in transferring coined 
money rather than uncoined metal is apparent. Coining the 
metal merely enables it to pass from hand to hand without the 
labor of inspection ; that is, without weighing it to determine 
its quantity and without testing it to determine its quality. It 
sells (if we may speak of selling money) on grade and reputa- 
tion rather than on inspection. It is the most salable of all 
commodities, and the fact that it is so standardized as to make 
inspection unnecessary on the part of the buyer has a great 
deal to do with giving it its superior salability. By the same 
process of standardization any other commodity may approach, 
gold coin in salability, though it may not quite reach it. At 
least it is safe to say that whenever it can be sold entirely 
on grade and reputation, and absolutely without inspection, its 
salability will be enormously increased. 



MARKETING 323 

Standards for measuring quantity. A short step is taken in 
the direction of standardizing other commodities when the state 
establishes uniform standards for determining quantity ; that is, 
when it fixes the standard of weights and measures. Without 
some uniform system even our present methods of selhng 
would be much more clumsy and wasteful. Every buyer would 
have to have his own system for determining the quantity of 
his purchases. This falls short, however, in two important 
particulars, of what is accomplished when metal is coined in 
a modern mint. In the first place, the government actually 
coins the money or requires it to be coined according to its 
own rules, whereas in other cases it only defines the units 
of measurement and commands conformity to its definitions. 
In the second place, coins are standardized not only as to 
quantity but as to quality as well. There is no probability 
that any government will be called upon to do that which 
would be analogous to coining money, — actually put up other 
commodities in standardized packages. Something is to be 
said in favor of fixing standards of quality as well as standards 
of quantity. 

Need for standards for determining quality. The reasons 
for fixing standards of quality, wherever it can be done, 
are identical with those for fixing standards of measuring 
quantity. They are all summed up in the superior economy 
of buying on grade and reputation as compared with buying on 
inspection. The buyer of an unstandardized commodity may 
have enough confidence in the seller's system of weights and 
measures to avoid the necessity of weighing and measuring for 
himself, but he can scarcely avoid the necessity of inspecting 
the commodity in order to determine its quality. In some 
cases the determination of its quality is easier than that of its 
quantity, but in other cases it is not. In all cases where quality 
can be standardized, there is economy of effort. So far as 
buyers can be saved the trouble of inspection, so far will they 
be enabled to economize the time and effort involved in making 



324 PRINCIPLES OF POLITICAL ECONOMY 

purchases, and so far also will the salability of commodities be 
increased. Whether this will reduce the cost of getting the 
standardized commodities from producers to consumers, or 
merely enable the consumers to use their time more advan- 
tageously to themselves, may be open to question ; but the 
ultimate economic effects are much the same in either case. 

Need of expertness in buying supplies. Not the least among 
the advantages of a minute division of labor is the fact that 
each individual can avoid the necessity of being expert in many 
things, and therefore has time to become a specialist in one 
thing. One of the advantages of the standardization of com- 
modities is that the average consumer can avoid the necessity 
of being an expert judge of the many articles which he has to 
purchase. He may therefore utilize his time and mental energy 
in his own special field of work. There is, to be sure, some- 
thing attractive in the custom of the well-to-do burgher going to 
market and selecting with the eye of a connoisseur the various 
articles needed by his household, but it is wasteful of time and 
mental energy. When he or his housekeeper is able to order 
by telephone, without any inspection whatever, and still get 
what he wants, more time is left for other things. 

This will help to explain two very distinct tendencies in 
present-day retail-marketing methods. The first is to put up more 
and more articles in standardized packages. The second is 
to place more and more dependence upon the retailer, who, in 
many cases, is coming to regard his customers as clients, to whom 
he is bound to give his own expert service. Both tendencies 
are designed to save the consumer the trouble of becoming an 
expert buyer and to leave him more time for other things. 
Neither tendency has as yet reduced the cost of getting prod- 
ucts from producer to consumer. If the consumer utilizes the 
time saved in marketing by doing work which earns him a larger 
income with which to purchase goods, it perhaps does him as 
much good as it would if these tendencies merely reduced the 
price of commodities. 



MARKETING • 325 

Marketing by telephone an American habit. Marketing by 
telephone is peculiarly an American habit. This may in part 
explain, and in part be explained by, the fact that two thirds of 
all the telephones in the world are in the United States and 
three fourths of them are in the United States and Canada. 
This habit makes it more and more difficult for the householder 
to inspect her purchases. She is therefore more and more 
driven to one of the alternatives mentioned above. She must 
order well-known brands, which are put up in standardized 
packages, trade-marked, and sold on grade or reputation, or else 
she must rely on her grocer or her marketman very much as 
she does on her physician, her lawyer, or her financial adviser. 
The quality of dependableness becomes, therefore, more and 
more important in the grocer and the marketman. Such 
qualities have to be paid for. Thus the householder saves 
time, but pays for the privilege. 

If she buys standardized goods in standardized packages, 
she will usually pay from 50 to 100 per cent more than she 
would if she bought in bulk and did her own inspecting and 
selecting. If she relies, as a client, upon the honesty and ex- 
pertness of her grocer and her marketman, she must pay for 
that. Honest and capable experts do not have to live on small 
incomes anywhere ; and when they go into the business of 
selling produce, they will charge for their services. 

Standardization should take place early in the marketing 
process. One reason why these tendencies merely save the 
time of the consumer, instead of reducing the cost of getting 
the products to him, is that the standardization takes place only 
in the last stage of the process ; that is, just before the com- 
modities reach the consumer. In order to reduce materially 
the spread between the price which the producer gets and that 
which the consumer pays, standardization must take place early 
in the process. This will enable the standardized article to go 
through the channels of trade at a lower cost. If it has to be 
inspected every time it changes hands, the process is expensive, 



326 PRINCIPLES OF POLITICAL ECONOMY 

and someone must pay the cost. Some products apparently 
cannot be standardized, so there must always be a wide spread 
between the producers' and the consumers' prices. 

A good illustration of the effect of standardizing a product 
early in the process of getting it from the producer to the con- 
sumer is found in the marketing of certain kinds of Western 
fruit. They are graded and standardized as soon as they leave 
the orchards. All subsequent inspection is therefore unneces- 
sary, and the cost of getting them to the consumer is reduced 
practically to the physical cost of haulage and handling. This 
has notably reduced the spread between the two prices. Many 
other commodities, such as wheat, cotton, pig iron, and coal, are 
sold largely on grade rather than on inspection. In these cases 
the government has had very little to do with the standardiza- 
tion. Two recent acts of Congress, however, have brought the 
government definitely into this field as the fixer of standards 
of quality. These are the Cotton Futures Act and the Grain 
Standards Act. Both give the Secretary of Agriculture power 
to establish grades and to enforce their use in the regular chan- 
nels of trade. A number of states also have passed grading 
laws of various kinds. Four New England states have passed 
a uniform apple-grading law, defining the contents of a stand- 
ard barrel, describing the various grades of apples, and impos- 
ing penalties upon all departures from the standard prescribed. 

Such legislative acts cannot be called in any true sense inter- 
ferences with trade. They are designed to increase the freedom 
with which commodities may circulate. They are somewhat 
analogous to the work of the traffic policeman on a crowded 
corner. He may exercise authority and interfere occasionally 
with an individual's movements, but the result of his so-called 
interference is greater freedom of traffic.^ 

Brands and trade-marks. Brands, trade-marks, and other 
selling devices of this general description would be useless or 

1 Compare the article by the author, on " Standardization in Marketing," in 
The Quarterly Journal of Economics^ Vol. XXXI, No. 2, pp. 341-344. 



MARKETING 327 

impossible without some kind of standardization in production 
or grading of products. Where these services are properly 
used, they are an aid to the buyer as well as to the seller. 
They help him to know what he is getting and enable even 
the inexpert buyer to buy safely. 

Advertising and salesmanship. From the point of view of 
the seller of any commodity there is not much doubt as to the 
efficacy of advertising and expert salesmanship. Serious doubts 
have been expressed, however, as to the social advantage of 
what may be called high-pressure selling. Why, we are asked, 
should we be subjected to all the arts of the expert salesman 
and advertiser, who are doing their utmost to persuade us to 
spend our money for things which we do not need ? On the 
other hand, it is replied, why should not every art of persua- 
sion known to the expert be brought to bear upon men to lead 
them to do what they ought to do ? This is what evangelism, 
moral leadership, and all sound instruction amounts to. If we 
are to allow freedom in the exercise of the arts of persuasion 
at all, it will be difficult to draw the line. Who shall act as our 
censor and permit one man and forbid another to persuade 
people to do what he wants them to do ? 

Except in extreme cases this argument is unanswerable. In 
the case of immoral acts, or any act which the moral sense of 
the community condemns, it is obviously as immoral to per- 
suade people to commit those acts as it is to commit them. 
If there is anything which men clearly ought not to buy, it is 
equally clear that men ought not to advertise it or try to sell 
it. But the difficulty, except in extreme cases, is to decide 
just what things it is proper, and what it is improper, to buy. 

It is quite clear, however, aside from all questions of legal 
conduct, that much of our advertising is a waste of human 
energy. Sometimes it is a service to a consumer to apprise 
him of the fact that he can buy something which he has long 
wanted, and to tell him where it can be had. In most cases, 
however, advertising serves no such purpose. One does not 



328 PRINCIPLES OF POLITICAL ECONOMY 

need an advertisement to apprise him of the fact that soap can 
be purchased. The only purpose served, in all such cases, is 
to persuade people to buy one brand rather than another. Our 
helplessness in such a situation is revealed to us when we con- 
sider that it would take a great deal of campaigning, accom- 
panied by advertising and high-pressure persuasion, to work up 
a public sentiment hostile to advertising. We might easily waste 
more energy in this campaign than is now wasted in advertising. 

Political campaigning. Socialists are in the habit of pointing 
to the wastefulness of advertising as one of the costs of com- 
petition. They do not point out, however, that a political cam- 
paign is just as wasteful as a selling campaign. The candidate 
for office advertises his candidacy and uses high-pressure per- 
suasion to get people to vote for him. Since the extension of 
government power and authority would multiply government 
offices, it would necessarily multiply the number of campaigners 
and greatly increase the waste of time and energy used up in 
political campaigns. Every campaigner, even he who is cam- 
paigning for socialism, is doing much the same kind of work 
as is done by the expert advertiser. He is using high-pressure 
persuasion to get men to do things which they would other- 
wise not do. 

It looks as though we should have to regard persuasion in all 
its aspects, except persuasion to do that which is morally con- 
demned, as a necessary cost of freedom. A despot could sup- 
press all persuasion, in politics as well as in salesmanship, but 
a free people can scarcely get along without it. Freedom is in 
some respects costly, but it is worth all it costs. 



CHAPTER XXVII 

ECONOMIC CRISES 

Financial crises. One of the most important and most 
puzzling of all modern economic questions is that of the fre- 
quent recurrence of financial crises and general industrial de- 
pressions. A financial crisis is an occasion when the money 
market becomes suddenly demoralized, confidence disappears, 
and credit shrinks. Everyone to whom money is owed wants 
it at once, but no one wants to let go of any money in his 
possession, for fear that he may not be able to get any more. 
Besides, there does not seem to be money enough to pay off 
existing debts. 

In the chapter on Banking it was pointed out that a large 
part of the business of the world was done on credit, without 
the actual handling of money. If you will imagine a group of 
men doing business with one another, where each one trusts 
every other, you will see that a large amount of business can be 
done with a ridiculously small amount of money. Many trans- 
actions will be carried on by means of promises to pay money 
instead of with the money itself. Many of these promises will 
be balanced against one another and canceled without the use 
of any money. In other cases the money will be used merely 
to pay the balances. But if something should happen to destroy 
confidence, so that no one would accept promises, but everyone 
demanded real money, there might not be money enough to 
go around and make the necessary payments. In that case 
business would have to slow down, and only as much business 
could be done as could be done with the small amount of 
money available. If, in addition to this, everyone held on to 
all the money he could lay hands on, for fear that he might 

329 



330 PRINCIPLES OF POLITICAL ECONOMY 

not be able to get any more, even the limited amount of 
money in circulation would move slowly, and business would 
have to slow down correspondingly. A swift dollar may pass 
from hand to hand many times in a day, and in this case 
it will do a large amount of business ; but a slow dollar 
passes from hand to hand only a few times a day, and does 
a small amount of business. 

Industrial depressions. An industrial depression is usually 
more deep-seated than a financial crisis and usually lasts for a 
longer time. It is a general stagnation of production because 
of an inability to get satisfactory prices for products. Various 
explanations, some intelligent and some absurd, have been 
offered. Overproduction is one of the most common and least 
intelligent. There may be such a thing as disproportionate 
production, but such a thing as general overproduction is a 
physical impossibility. The production and supplying of one 
thing is a demand for something else ; the more production, 
the more demand ; but if some things are produced and offered 
for sale, and there is no demand for them, it means either 
that those few things are overproduced or that the other things 
which might be exchanged for them are underproduced. 

The overproduction theory. One phase of the overproduc- 
tion theory of industrial depression is that wages are so low 
that the laborer is not able to buy his own products. It is 
argued that this results in an overproduction and glut on the 
market. There are many excellent reasons why wages should 
be higher than they are, but this is not one of them. So far 
as its effect on the general purchasing power of the community 
is concerned, it makes no difference whether wages are high 
and rents, interests, and profits are low, or whether wages are 
low and rents, interests, and profits are high. If the laborer 
gets a small share of the production of a given industry, and 
the managers, landowners, and capitalists get a large share, 
these have a large purchasing power and the laborer a small 
purchasing power. The value of the whole product of every 



ECONOMIC CRISES 



331 



industry goes to these various classes, and they have it all to 
spend. If one class possesses a large share, and another class 
a small share, the total amount to be spent for other commodi- 
ties is not affected by that distribution. If the laborers get 
absolutely the whole product of an industry, there would be no 
more to spend on other products than if the laborers got one 
half the product and the other participants got the other half. 
This, let it be repeated, has nothing to do with other and 
excellent reasons why wages should be high. 

The periodicity theory. A certain periodicity has been 
observed in the recurrence of crises and depressions. It is not 
always easy to determine just the interval that elapses between 
depressions. Sometimes they come approximately twenty years 
apart, but they have a disconcerting habit of coming at unex- 
pected times. In his book on '' Economic Crises " Jones gives 
the following table : ^ 

LIST OF ECONOMIC CRISES 



United 




France 


United 


England 


France 


States 






States 






— 


1792-93 


— 


1S47 


1847 


1847 


— 


1796 


— 


— 


— 


1855 


— 


— 


1804 


1857 


1857 


1857 


— 


1810-II 


— 


— 


1866 


— 


1812 


— 


— 


1869 


— 


— 


— 


— 


1813 


1873 


1873 


1873 


— 


1815 


— 


— 





1882 


1818 


— 


1818 


1884 


— 


1884-5 


1825 


1825 


1825 


1890 


1890 


1890 




— 


1830 


1893 


— 


1893 


1837-39 


1836-39 


1836-39 









In the nineteenth century it will be noticed that there were 
severe crises in 18 18, 1837, 1857, with lesser crises in 1825 and 
1847. The severe crises seemed to come every twenty years 



1 Edward D. Jones, Economic Crises. The Macmillan Company, New 
York, 1900. 



332 PRINCIPLES OF POLITICAL ECONOMY 

for almost half a century. Again there were severe crises in 
1873 and 1893, with a less severe one in 1884. Another one 
occurred in 1907. 

Various attempts have been made to explain this apparent 
periodicity. The late William Stanley Jevons developed an 
interesting theory of the coordination between sun-spot cycles 
and industrial depressions. The sun-spot cycles, he argued, 
had a profound effect on the weather, rainfall, etc., and these 
in turn affected the agricultural basis of the world's wealth. 
This theory, however, had not been taken seriously by the 
economists until it was recently revived by the interesting 
observations of Professor Ellsworth Huntington. It is true 
he has not developed the theory at great length as applied to 
economic crises, but he has presented strong evidence in favor 
of the doctrine that solar disturbances profoundly affect climatic 
conditions and rainfall, and these in turn have produced great 
historical and economic disturbances. ^ 

The overspeculation theory. There is a persistent belief 
among all students of the question that overspeculation has 
something to do with depressions. When a fever of specula- 
tion takes possession of a community, the prices paid for the 
articles in which people are speculating do not bear any logical 
relation to the real values. The speculator will pay any price 
for anything, provided he thinks he can sell it later at a still 
higher price. When prices are tending rapidly upward, he may 
rely on the mere momentum to carry them higher. There is 
only one possible outcome of this tendency ; that is, a rapid fall 
in the prices of the commodities in which men are speculating. 

Even though the speculation takes place in a single article, 
it may produce a profound economic disturbance. The money 
that is absorbed in the speculative purchasing of the article in 
question is necessarily withdrawn from other kinds of business. 

1 Ellsworth Huntington, " Climatic Changes and Agricultural Exhaustion 
as Elements in the Fall of Rome," Quarterly Journal of Economics, February, 
1917. See also "The Pulse of Asia," Houghton Mifflin Company, Boston, 1907. 



ECONOMIC CRISES 333 

This in itself produces some disturbance. When a fall in 
prices begins, a general bankruptcy among the speculators takes 
place. When a number of men become bankrupt and are 
unable to pay their obligations, a process begins which may be 
compared to knocking over one brick in a row of bricks stand- 
ing close together. The falling of one brick knocks over the 
one next to it, and so on until the whole row falls. Accordingly, 
if one individual who owes money to another fails to pay his 
debt, the latter, not being able to collect his money, fails to pay 
his obligations to a third, and so on ; one after another fails, 
and the bankruptcy spreads throughout the community in a 
sort of wave motion. A depression always follows speculation 
of any kind, whether it be a real-estate boom or a boom in 
short-horn cattle, or Belgian hares, or French bulldogs. This" 
has led to the sage remark that '' the echo of a departed 
boom is the saddest sound in nature." 

The real-estate boom. The wave of speculation in land 
which is known as a real-estate boom is one of the most inter- 
esting and instructive of all subjects of economic study. No 
one has ever been able to explain just how it starts ; but after 
it has started, it is not so difficult to understand. Something 
happens, let us say, to produce a very rapid rise in the price 
of city lots. Men double and quadruple their money in a short 
time by merely buying and selling again at a higher price. 
This sets them and others crazy. Everyone wants to buy lots 
for the purpose of selling again. The first effect of this is to 
greatly increase the number of buyers, and the effect of this is 
to send the prices still higher. These buyers, as a consequence, 
also make money rapidly. This attracts still other buyers, some 
of them coming from long distances to share in the harvest. 
So long as buyers are increasing faster than sellers, prices con- 
tinue to go up ; but when the buyers become less numerous than 
the sellers, which must inevitably happen, prices begin to fall. 
Suddenly everyone becomes a seller and there are no buyers at 
all. Stagnation, depression, bankruptcy, and general ruin ensue. 



334 PRINCIPLES OF POLITICAL ECONOMY 

The recovery is very slow. The men who are left with land 
on their hands are not fitted to use it. They did not want it 
for use ; they only wanted it to sell. This means an inefficient 
use of the land. Besides, even those owners who are fitted to 
put the land to an economic use are handicapped because they 
put too much money into the land and have too little with 
which to develop or use it. Those who were lucky enough to 
sell out in good time are very careful not to let go of their 
money or to invest it in productive industry. Years usually 
elapse before the city recovers from the disaster. 

Speculation in farm land, in railroads, in mining, as well as 
in Belgian hares, tulips, and short-horn cattle, has produced 
a number of historic depressions of this kind. 

The overinvestment theory. There are, however, even more 
fundamental and far-reaching reasons than these for a certain 
tendency to overinvestment in certain special lines of industry. 
Overinvestment may produce very much the same results as 
overspeculation, though they are not likely to be so acute or 
so sudden in their appearance. 

Overinvestment in the railroads of the Far West is supposed 
to have had something to do with the panic of 1857. The rail- 
roads were built, the capital was sunk, and then it began to 
appear that it would be some years before there would be busi- 
ness enough to put the railroads on a paying basis. Meanwhile 
all that capital had been diverted from other industries, which 
suffered in consequence. In many cases, however, the shares of 
the new railroad enterprise had been bought on credit. As soon 
as it appeared that dividends were not to be speedily forth- 
coming, the value of the shares fell rapidly, and those who 
had invested on credit in many cases suffered bankruptcy. 

There is something also in the very nature of modern indus- 
try which seems to render it highly sensitive. The countries 
which show the largest amount of enterprise and the adventur- 
ing spirit not only expand most rapidly but also, at the same 
time, seem to have the largest number of industrial depressions. 



ECONOMIC CRISES 335 

The tendency to rush headlong into new enterprises is doubt- 
less an important factor in national expansion, but it also pro- 
duces a severe reaction when this headlong spirit rushes too 
far in a given direction. 

The following is from an article by the author : ^ 

One characteristic of a modern industrial community is the proportion 
which producers' goods hold to the total wealth. This means that a large 
•part of the wealth is in forms which have no utility in themselves, but 
which derive their utility from the goods which they help to produce. A 
satisfactory explanation of industrial depression must, in the opinion of the 
present writer, be sought in the laws of value which govern investment in 
this class of goods, rather than in the examination of the conditions of the 
money market, or conditions of organized credit. 



VIOLENT FLUCTUATIONS OF THE VALUE OF PRODUCERS' 
GOODS ON THE INVESTORS' MARKET 

Let us begin by noticing a few elementary facts. Every farmer knows 
that a horse which will not earn more than his feed, or a piece of land which 
will not produce more than it costs to cultivate it, is of no value. Likewise 
every business man knows that an establishment that cannot be made to 
pay more than running expenses is worth nothing except as old iron. This 
is equivalent to saying that the value of such an establishment — or indeed 
of any productive agent — is determined not by the total value of its 
product, but by the excess of that total value over and above the run- 
ning expenses. When the running expenses are high and the output large, 
so that the earnings depend upon small profits and large sales, a very 
slight rise in the value of the product may double or more than double the 
value of the establishment, provided, of course, that the rise in value is 
believed to be permanent. Let us suppose that a certain shoe factory can 
be made to turn out 100,000 pairs of shoes in a year at a uniform cost of 
$2 a pair. If these shoes cannot be sold at more than $2 a pair, the plant 
is worthless; but if they can be sold at $2.25 a pair, the earnings of the 
plant will be $25,000, which, capitalized at 5 per cent, will make it worth 
$500,000. If, however, the price of shoes should rise to $2.50, the earn- 
ings of the plant would be double ; and if this rise in value were believed 
to be permanent, the value of the plant would double. Thus an increase 
of only one ninth in the value of the product would double the value of 

1 " A Suggestion for a Theory of Industrial Depressions," Quarterly Journal 
of Economics y May, 1903, p. 497. 



336 PRINCIPLES OF POLITICAL ECONOMY 

the plant. In the same way, a subsequent fall of one tenth in the value of 
the product would reduce the value of the plant by one half, while a fall 
of one fifth in the value of the product would destroy the value of the 
plant altogether. This may be stated as a general law to the effect that 
a slight fluctuation in the value of a product tends, to produce a violent 
fluctuation in the value of the establishment producing it. Stated in still 
more general terms, the value of producers' goods tends to fluctuate more 
violently than the value of consumers' goods. 

This law is capable of still further extension when we consider that pro- 
ducers' goods are themselves produced by other productive agents. The 
different parts of the shoe factory of the above illustration v^^ere produced 
in other factories, and the fluctuations in the value of the shoe factory would 
tend to produce still more violent fluctuations in the value of the establish- 
ments producing the different parts, for the same reasons as were given 
above. The law might therefore be extended so as to read. The farther 
removed the producers' goods are from some consumable product, and the 
more remotely their value is derived from that of some consumable product, 
the more violent the fluctuations in value tend to be. 

This would be the tendency until that stage was reached where the pro- 
ducers' agents were no longer especially connected with one particular line 
of production, and were not therefore affected merely by changes in price 
of the one kind of consumable product. 

It must be admitted that the fluctuations in the value of producers' 
goods were never actually so violent as the foregoing illustrations have 
supposed, mainly for the reason that not every rise or fall in the value of 
products is believed to be permanent. But where the high or low price of 
a product continues for some time, it invariably leads to a belief that it is 
likely to continue ; and this raises or depresses the price of the productive 
agent out of proportion to the rise or fall in the price of the product. 

In this connection it is well to observe that while the immediate demand 
for consumers' goods comes from consumers themselves, the immediate 
demand for producers' goods comes from investors. Since their willingness 
to invest depends, not upon the value of the gross product of the productive 
agent, but upon the excess of that gross product over and above the cost of 
using the agent, — which excess has been shown to fluctuate more violently 
than the total value, — the instability of the investors' market is therefore 
not altogether due to psychological changes on their part, but in a large 
degree to the objective causes which affect the value of the things in which 
they invest. 

A slight rise in the price of consumers' goods will so increase the value 
of the producers' goods which enter into their production as to lead to larger 
investment in producers' goods. The resulting large market for producers' 



ECONOMIC CRISES 337 

goods again stimulates the production of such goods and withdraws pro- 
ductive energy from the creation of consumers' goods. This for the time 
tends to raise the price of consumers' goods still higher, and this again to 
stimulate still further the creation of producers' goods. There is no check 
to this tendency until the new stocks of producers' goods begin to pour upon 
the market an increased flow of consumers' goods. This tends to produce 
a fall in their value, which in turn produces a still greater fall in the value 
of producers' goods ; and so the process goes. There seems, therefore, to 
be a fundamental reason for the periodicity of industrial depression, which 
can only be removed by such a complete knowledge and understanding of 
the situation as would enable the business world to foresee the tendencies 
and take measures to overcome them. 

These observations regarding the law of value as applied to different 
classes of goods may throw some light on the relative stability in the price 
of a consumable article, such as sugar, in comparison with the price of such 
an article as steel, which belongs to the class of producers' goods several 
steps removed from consumers' goods. The market for sugar is mainly a 
consumer's market, while the market for steel is mainly an investor's market. 
A consumer's market depends upon the willingness of the public to consume, 
while an investor's market depends upon their willingness to invest. As was 
shown above, there are reasons, other than psychological, why an investor's 
market must be more unstable than a consumer's market. 



CHAPTER XXVIII 

FREE TRADE 

Advantages of exchange among individuals of the same 
country. Freedom of exchange between individuals is so 
clearly advantageous that practically no one advocates serious 
restrictions upon it. Freedom of trade between different sec- 
tions of the same country also is generally approved. It would 
seem absurd for the South, which is peculiarly adapted to cot- 
ton, to try to be entirely self-supporting, and especially to pro- 
duce certain things, such as wheat, for which its soil and 
climate are not so well suited as are those of other sections of 
the country. No one would seriously advocate an interference 
with the shipments of wheat and wheat flour to the South or 
of cotton to the North. 

Advantages of exchange among individuals of different coun- 
tries. It is argued by a large majority of the students of econom- 
ics that the same arguments which favor a policy of freedom 
of exchange within the country are equally in favor of freedom 
of exchange between different countries. The lines which 
separate one country from another are frequently arbitrary 
political boundaries and do not necessarily interfere with the 
channels of advantageous commerce. These students would 
hold that there is no more reason why there should be an 
interference with freedom of trade across the St. Lawrence 
and the Great Lakes than across the Ohio River or the Mis- 
sissippi. If there are individuals in Canada who desire products 
from the United States, and individuals in the United States 
who desire products from Canada, there is no more reason 
why they should be forbidden to make the exchange than there 
is why two citizens from different states of the United States 
should be forbidden to exchange their products. 

338 



FREE TRADE 



339 



The diversion of labor and capital from the more pro- 
ductive into the less productive industries. The positive argu- 
ment in favor of freedom of trade rests upon one or two 
fundamental propositions. One of these is that the labor and 
capital of any region tends of itself to seek those opportunities 
and to develop those industries which are most profitable to 
themselves. From this it would follow that any interference 
with this process, or any attempt to develop an industry in a 
region where it would not develop without special favors, must 
necessarily be a mistake. It would merely divert labor and 
capital from the more productive to the less productive indus- 
try. Left to itself, labor and capital in the southern part of 
the United States will go into the growing of cotton without 
any governmental encouragement. This is a sign that cotton- 
growing is one of the most productive opportunities of that 
region. Any attempt to tax cotton-growing, and out of the pro- 
ceeds to pay a bounty to some other industry, would merely 
mean that a certain amount of the labor and capital of the 
South would be diverted from the cotton industry, in which it is 
most productive, into an industry in which it would be less pro- 
ductive. If the new industry is not less productive, labor and 
capital would go into it anyway ; if it is less productive, it would 
be a waste of resources to divert labor and capital into it instead 
of allowing them to go where they would naturally go. 

Against this fundamental proposition of the free-trade 
school the protectionists have never been able to launch a 
successful frontal attack. They have, however, attacked the 
policy of free trade at other points. The arguments which 
they have been able to use have, on the whole, proved some- 
what more popular than this severely simple doctrine on which 
the free-trade argument is based. There are six popular argu- 
ments in favor of protection, besides some others that are not 
so popular, though perhaps of greater scientific weight. These 
six arguments may be characterized as follows : (i) The balance- 
of -trade argument; (2) the home-market argument; (3) the 



340 PRINCIPLES OF POLITICAL ECONOMY 

infant-industries argument ; (4) the standard-of -living argu- 
ment ; (5) the anti-dumping argument ; and (6) the necessity- 
for-military-supphes argument. 

The balance-of-trade argument. By the balance-of-trade 
argument is meant the old theory that a nation is rich when 
it sells abroad more than it buys. There is a certain super- 
ficial analogy between the condition of the private individual 
and that of the nation. It looks at first thought as though the 
private individual who was selling more than he was buying was 
getting rich. This, however, is only an appearance. It is true 
that so long as he is selling more than he is buying he is 
accumulating money ; but unless he invests that money sooner 
or later, it will do him no good. When he invests, he is really 
buying something with it ; otherwise he merely becomes a 
miser and hoards his money instead of using it. The indi- 
vidual who saves or the individual who accumulates money for 
a time, say for a year, may be prospering in the sense that 
he is accumulating the power to purchase something else later 
on ; but suppose that during the next year he invests all the 
accumulations of the preceding year, then it will happen that 
during this next year he will be buying more than he is selling. 
No one will claim that he grows poorer by the process. 

Similarly with the nation that continually sells more than it 
buys, — if it never buys anything from the outside with that 
money, the money is of no use to it ; if it merely keeps it in 
circulation within its own boundaries, it will have more money 
in circulation, but no more goods. Everybody will merely mark 
up prices and call himself rich. Sooner or later, however, this 
process must come to an end, for if prices continue to rise 
within the country, it becomes a poor country in which to buy 
products. Foreign buyers will, so far as possible, go to other 
markets for their supplies. At the same time it becomes a 
good country in which to sell. Foreign producers will seek to 
sell their goods within the country where high prices prevail, 
and if the prices are high enough, the protective tariff ceases 



FREE TRADE 341 

to be a hindrance. The combination of these two processes 
would speedily drain some of the surplus money out of the 
country ; that is, when foreign producers sell large quantities 
to the country, and foreign buyers buy small quantities, there 
must come an equilibrium in prices so far as the com- 
modities which enter into international trade are concerned. 
There are some commodities and services which do not enter 
into international trade, and the prices of these may remain 
on different levels for considerable periods of time. 

During the first year or two of the great European war, 
which was inflicted upon an astonished world by the Turco- 
Teutonic powers, Americans had an excellent illustration of 
the fallacy of the balance-of-trade argument. We immediately 
began selling vast quantities of supplies to the Allies, who 
were defending themselves against attack and invasion. Their 
productive power was diverted from the field of industry into 
the field of war, so that they had very little to sell to us. The 
consequence was that vast quantities of nioney had to be sent 
in payment for the supplies which we sent to them. It looked 
for a time as though we were prospering amazingly by this 
process. Money was very abundant, but goods were becoming 
scarce. It was not long before the people began to realize that 
they could not live on money, — that, after all, goods were what 
they wanted. Some relief came when the United States began 
to lend the money back again to the Allies, so that they could 
purchase more and more supplies ; that is, some of the surplus 
money, instead of being used in the purchase of ordinary com- 
modities, was used in the purchase of foreign securities, including 
the bonds of foreign governments. 

Nothing could be more elementary or more incontrovertible 
than that every country must in the long run pay for its foreign 
supplies with its own products. If it happens to produce gold 
and silver in large quantities, these of course must be reckoned 
among its own products, and it may pay for a portion of its 
foreign supplies with this gold and silver. In the long run, 



342 PRINCIPLES OF POLITICAL ECONOMY 

therefore, the country that restricts importation must necessarily, 
and in exactly the same degree, restrict exportation. 

The home -market argument. As to the home-market argu- 
ment, this has been peculiarly effective with farmers. It has 
been pointed out to them that unless factories are built up in 
their own neighborhood, they must depend upon distant mar- 
kets for the sale of their products. To sell their products in 
these distant markets and get their own supplies back, it is 
said, involves heavy expenses in the form of freight rates. If 
these expenses, however, were so heavy as to overbalance the 
other advantages and disadvantages involved, manufacturing 
would be developed in the home market without any govern- 
ment aid or interference. If, for example, the difference in 
the cost of growing wheat in Alabama and North Dakota were 
less than the freight rates from North Dakota to Alabama, 
Alabama would find it advantageous, without any government 
help, to grow her own wheat ; but if it costs, let us say, twenty 
cents more per bushel to grow wheat in Alabama than in 
North Dakota, and the freight rate is only ten cents, then it 
would be very much more profitable to import wheat or wheat 
flour from North Dakota. 

The same principle would apply to manufacturing products. 
If the difference in the cost of manufacturing a yard of cloth 
in Kansas and in New England is less than the freight rate 
from New England to Kansas, some cotton manufacturer 
would be pretty certain to locate his business in Kansas in 
order to save that freight rate ; but if the difference in the cost 
of production is greater than the freight rate, then it would be 
a mistake to encourage the manufacture of cloth in Kansas. 
This principle would apply between different countries as 
well as between different sections of the same country. The 
home market, in short, is preferable to a distant market only 
when, with a given amount of productive energy, more can be 
produced by saving transportation than can be produced even 
when goods have to be transported over long distances. 



FREE TRADE 343 

The infant-industries argument. As to the infant-industries 
argument, there is undoubtedly something to be said on the 
side of protection. The argument is good, however, only on 
condition that the infant industry, after it is once established 
and ceases to be an infant industry, is then able to take care 
of itself without further protection. If it is not, and if it con- 
tinually needs protection, it becomes not a policy for the 
protection of infant industries but a policy for the protection 
of those that are in a state of senile decay. It is a policy for 
keeping alive industries that ought to be dead. 

There are two rather fundamental objections to a protective 
policy based on the infant-industries argument. In the first 
place, no matter how much protection is given to any industry, 
there will always be certain establishments that are just on the 
margin of bankruptcy. There will be men who are so poorly 
qualified for managing a business, or who have located their 
businesses in such disadvantageous places, that they have to 
compete with more productive industries for their labor and 
supplies, and are thus barely able to keep going. Any attempt 
to double and treble the amount of production merely calls into 
existence business establishments run by less qualified managers 
or located in less advantageous positions, so that with respect 
to business establishments it becomes a truism that '' the poor 
ye have with you always." Conversely, any attempt to take away 
or reduce the amount of protection will necessarily mean bank- 
ruptcy to those marginal establishments. They can always 
bring pressure to bear upon Congress and can always show 
convincingly that they would be ruined if protection were taken 
away. Thus the infant-industries argument sooner or later 
inevitably becomes an argument in behalf of the small or the 
inefficient producer. In the second place, as laws are made in 
any democratic country, the lobby (which has sometimes been 
called the third House of Congress) is a powerful factor. The 
real infant industry is seldom able to support a powerful 
lobby. Generally speaking, the larger and more prosperous the 



344 PRINCIPLES OF POLITICAL ECONOMY 

industry, the larger and more efficient the lobby which it can 
support. This makes it extremely improbable that the infant 
industry will get protection and extremely probable that the 
gigantic industry will get it. 

The standard-of-living argument. By the standard-of-living 
argument is meant the argument that, since American laborers 
get higher wages and maintain a higher and more expensive 
standard of living than most foreign laborers, it is necessary 
to compensate the manufacturer for these higher wages by 
enabling him to get somewhat higher prices for his product. 
From the free-trader's point of view this looks like putting the 
cart before the horse. The reason why wag^s are higher in 
one country than in another is because labor is more productive 
in the one than in the other. If labor is more productive, the 
laborer creates the product out of which his higher wages are 
to be paid. We have had such an abundance of natural resources, 
and, on the whole, compared with old and overcrowded coun- 
tries, such a dearth of labor, that the marginal productivity of 
labor has been high in this country. The unprotected industries 
pay these wages as well as the protected. If a given industry 
is not able to compete against agriculture and mining in hiring 
labor, that is a sign that the industry in question is not as pro- 
ductive as agriculture and mining. Therefore it would be a 
mistake to tax the more productive industries in order to allow 
a bounty or a higher price to the less productive industry. In 
the past, at any rate, there have been so many opportunities for 
poor people to go onto the land and work for themselves and 
eventually become landowners that manufacturers have had 
some difficulty in getting labor for their factories. In other 
words, labor has found a better opportunity somewhere else. 
Two methods have been resorted to by the manufacturers to 
overcome this difficulty. One has been the wholesale importa- 
tion of foreign labor ; the other is the securing of protective 
duties in favor of their business. It would seem that anyone 
with a sense of humor could hardly keep his face straight 



FREE TRADE 345 

while importing the cheapest kind of foreign labor to fill his 
factory and at the same time demanding protection in order 
that American labor might maintain its high standard of living. 

The anti-dumping argument. As to the anti-dumping argu- 
ment, there is a certain justification for it. By the anti-dumping 
argument is meant the argument that an old and well-established 
industry may, whenever it finds itself with a surplus product 
which is difficult to sell in its own country, offer it for sale 
in a foreign country far below the cost of production ; or, as 
the argument is put in the country where protection is advo- 
cated, the foreign producer may dump his surplus onto our 
markets and demoralize the business of production here. 

In so far as this dumping policy is temporary and spasmodic, 
there is a good deal to be said in favor of the policy which will 
restrict it. If, for example, a group of foreign manufacturers 
were to dispose of a temporary surplus in this country far below 
the cost of production, and keep it up spasmodically for a few 
years, it might cause bankruptcy among our own producers 
and discourage others from entering the business. As a result 
we might find ourselves in a short time with no industry of our 
own. Then the foreign producers would no longer need to dump 
their surplus onto us, but could charge us a good high price. 

On the other hand, if the policy of dumping a surplus 
product onto us is a permanent one, there is everything to be 
said in favor of allowing it to go on and allowing the home 
industry to die out. It merely enables us to get permanently 
a product much cheaper than we could produce it ourselves. 
The labor and capital which would otherwise be engaged in this 
industry would now better be engaged in som,e other. It has 
been humorously pointed out that the greatest case of dumping 
in the world is that of the sun, which sends us light and heat at 
ruinously low prices. Inasmuch as it is a permanent policy of 
the sun, we can easily adjust ourselves to it and dispense with 
any industry which would propose to supply us with daylight 
and summer heat. 



346 PRINCIPLES OF POLITICAL ECONOMY 

Not many years ago certain countries gave a bounty for the 
export of sugar. This looked Hke a permanent policy for en- 
couraging the dumping of a certain commodity on other markets. 
The chief result was that England, a free-trade country, got an 
abundant supply of very cheap sugar. This not only gave her 
a cheap food product but enabled her to develop certain indus- 
tries, such as the making of jam and marmalade, on a large 
scale, and to sell the products of these industries on the markets 
of the world, sometimes selling them back to the countries 
which had given a bounty on the exportation of sugar. 

The military-defense argument. So long as war is a possi- 
bility the necessity for military defense will remain with us, 
and so long as we must be prepared for military defense the 
argument in favor of producing certain essential military sup- 
plies at home, even at greater cost than they could be produced 
abroad, will be overwhelming. It is obvious that at the very 
time when we need military supplies most — in time of war — 
we may not be able to get them at all if we depend upon for- 
eign sources. This would apply not only to military supplies 
in the technical sense, that is, goods and ammunitions, but also 
to every article which is indispensable in time of war. It might 
easily happen that a nation would fail in its military operations 
by reason of a lack of some single military article like nitro- 
gen or copper, and suffer a national disaster and humilation in 
consequence. Until we can be reasonably certain that war has 
been permanently eliminated, the argument for government en- 
couragement of the production of every indispensable military 
article is overwhelming. The free-trader really has nothing 
effective to say .against it. 

Aside from these six arguments there are certain large his- 
torical arguments that are frequently used by the protectionist. 
It is pointed out, for example, that America has prospered 
amazingly under a protectionist policy. It is, however, equally 
true that England has prospered amazingly under her free- 
trade policy. She became prosperous before her European 



FREE TRADE 347 

neighbors did, and outstripped them all, at least during the 
first half century of her free-trade policy. Again, the protec- 
tionist points to the recent rapid advance in prosperity and 
industrial power of Germany as an example of the beneficence 
of the protectionist policy. To this the free-trader can retort 
that Germany's prosperity began with the formation of the 
present Empire after 1870. The taking away of the tariff walls 
between the German states and the establishing of a free-trade 
area within the whole Empire created a much larger free- 
trade area than had formerly existed. Secondly, the efficiency 
of the German system of technical education has contributed 
more than any other single factor to her prosperity. In the third 
place, Germany has had the advantage of a lower standard of 
living. England became prosperous long before Germany did, 
and as a result of her prosperity wages rose, and likewise salaries 
and all living expenses. The English workingman gets higher 
wages than the German workingman. All the salaried men in 
English factories get higher wages and work shorter hours than 
the salaried men in German factories. The English agents in 
foreign ports not only get higher salaries, but insist on week- 
end holidays and on having several afternoons off during the 
week in order to play golf and tennis, whereas the German 
agent works continually every day and Sunday. In other words, 
part of Germany's advantage has been her lower standard of 
living. The free-trader would say, ''Let's wait and see how 
long Germany can maintain her low standard of living after 
she becomes as prosperous as England has been." It may be 
that after she has enjoyed prosperity as long as England has, 
there will come the same softening in her vigor, the same 
desire for luxurious expenditure and leisure, and she will thus 
lose her chief advantage in international competition. If it is 
any comfort for the protectionist to point out that free trade 
tends to overprosperity, and prosperity to softening, he is 
welcome to it. 



CHAPTER XXIX 

PROTECTIONISM 

The weight of the argument in the last chapter was over- 
whelmingly in favor of free trade except in the matter of war 
supplies. Sometimes, however, it seems as though the free- 
traders were willing and able to answer all the arguments in 
favor of protection except the real ones. They confine them- 
selves, in other words, to the popular arguments which have 
not now and never did have any support from serious students 
of the problem. The following arguments may not appeal to the 
popular mind, nor furnish much support to any particular tariff 
bill. They do, however, outline certain possibilities of a protec- 
tive tariff if the government really wants to go about it seriously. 

Some possibilities of a protective tariff .^ (i) A tariff duty 
is not necessarily paid by the home consumer ; (2) a protective 
tariff may be so framed as to raise wages ; (3) it may be so 
framed as to attract labor and capital from the less productive 
into the more productive industries,' — judged from the stand- 
point of the community rather than from that of the individual 
business man. 

When the consumer pays the tariff. Whether the home con- 
sumer pays the tariff duty or not depends upon whether or 
not the tariff duty raises the price, in the home market, of the 
article upon which it is collected. Whether it raises the price 
or not depends upon whether it reduces the supply of the article 
in the home market or not, it being assumed that the duty 
will not affect the demand. The effect of a duty is ordinarily 

1 The rest of this chapter is from a paper read by the author before the 
American Economic Association and published in the Proceedings of the 
association in 1902. 

348 



PROTECTIONISM 349 

to reduce the amount of the article imported. The question 
is, Will the home product then increase, as a result of the duty, 
sufficiently to, counterbalance the diminution in the amount 
imported ? If the conditions are such that a tariff duty will 
occasion an increase in the domestic product equal to the 
diminution in the amount imported, the duty will occasion no 
change in the total supply on the home market, and conse- 
quently no general change in the price of the article ; but if 
the domestic product does not increase sufficiently to offset 
entirely the diminution in the amount imported, there will be 
a decrease in the total supply on the home market, and con- 
sequently a rise in price. 

When the increase in home production offsets the decrease in 
importation. The question then becomes. Under what con- 
ditions will a tariff duty occasion an increase in the domestic 
product sufficient to counterbalance the diminution in the 
amount imported ? If the duty is laid upon an article not 
producible at home under existing conditions and at existing 
prices, there can manifestly be no such increase in the domes- 
tic product, and the price will rise in consequence of the duty. 
How large a share of the duty will be added to the price of 
the article will depend upon the comparative elasticity of the 
demand and the supply. 

When the foreign producer pays the tariff. If the demand 
is highly elastic, while the supply is inelastic, only a small pro- 
portion of the duty will be added to the price ; that is to say, 
an elastic demand means that if there is a slight rise in the 
price of the article to the consumer, it will cause a great fall- 
ing off in the amount purchased. In other words, the con- 
sumer may be said to have considerable power of resistance. 
On the other hand, if a considerable fall in the price which 
the producer can get will cause only a slight falling off in the 
amount produced, as will happen when there are considerable 
differences in the cost of producing different parts of the sup- 
ply, the supply is inelastic. When the demand is elastic and 



3 so PRINCIPLES OF POLITICAL ECONOMY 

the supply relatively inelastic, the burden of a tariff duty will 
be borne largely by the foreign producer and only to a slight 
degree by the home consumer. Reversing the argument we 
shall reach the conclusion that when the demand for the article 
is inelastic and the supply relatively elastic, the burden of the 
duty will fall largely upon the home consumer. 

When a tariff is prohibitive. When both the supply and the 
demand are very elastic, a tariff duty will tend to be prohibitive ; 
that is to say, if a slight rise in the price to the consumer 
would cause a large falling off in the amount consumed, and a 
slight fall in the price to the producer would cause a great falling 
off in the amount sent to the tariff country, manifestly neither 
the producer nor the consumer can be made to pay the tariff 
and the article will practically cease to be imported. 

If the article is produced at home, but under the law of 
expanding cost (commonly confused with the law of diminish- 
ing returns), the presumption is that as much is already being 
produced at any given time as can be produced at existing 
prices. The one condition for an increase in the home product 
is that there shall be a rise in price. It is evident that the 
domestic product could not increase sufficiently to keep the 
prices down, for the reason that if the prices were kept down, 
there could be no increase in the home production. A duty 
on such an article would raise the price of the article, and be 
borne, in part at least, by the home consumer. 

In case the duty is laid upon an article which is produced at 
home under the law of diminishing cost (provided its production 
has not been monopolized), a different result follows. In a case 
of this kind the shutting out of a part of the foreign supply 
increases the opportunities for the marketing of the home prod- 
uct ; and since the home product can be increased without any 
increase in cost, there is nothing to prevent it from increasing 
enough to offset entirely any diminution in the amount im- 
ported. In this case there is no reason to expect that the price 
will be higher under the tariff than it would be without the tariff. 



PROTECTIONISM 351 

The shutting out of a part of the foreign supply is analogous 
to a normal growth in the consumption of the article, — at 
least in so far as it affects the home producers. They find 
an increase in the consumption of their products, and it 
makes no difference to them whether this is due to a decrease 
in importation or to a growth in the normal consumption of 
the article. Few economists would contend that a normal 
growth in the consumption of an article which could be in- 
definitely increased at diminishing cost would cause the article 
to sell at a higher price. It is the position of this chapter that 
there is no better ground for contending that a tariff duty on 
an article already producible at home under the law of dimin- 
ishing cost would raise the price of the article, or that when 
there is no natural check, such as increasing cost, to the home 
production, there is no reason why the home production may 
not increase enough to make up entirely for any falling off 
in the amount imported. ^ 

The case of monopoly. If, however, the article is one whose 
home production is in the hands of a monopoly, the shutting 
out of a part of the foreign product would increase the 
monopoly's power over the home market and give it an oppor- 
tunity to exact a somewhat higher price than would otherwise 
be possible. There is a very widespread belief that a monopoly 
fixes the price of its product according to a different principle 
from that which is followed by a single producer in a competi- 
tive industry ; but such is not the case. In either case the price 
is fixed at the point which will yield the largest net income to 
the producer. The difference is that the individual producer in 
a competitive industry has to face a different set of conditions 
from that which confronts the monopolists. The competitive 
producer knows that if he charges too high a price for his 
products, his sales will fall off rapidly, not only through the 
unwillingness of the public to buy the product, but also through 

1 In fact, there are reasons for believing that the price would fall. Cf. 
Alfred Marshall, Principles of Economics, 4th ed., p. 525. 



352 PRINCIPLES OF POLITICAL ECONOMY 

the underselling of his competitors. If he held a monopoly, 
he would know that a similar rise in the price of the product 
would cause his sales to fall off less rapidly, because only one, 
namely, the former, of those two forces would operate. 

While both the monopolist and the competitive producer try 
to sell at the point of highest net return, that point is likely to 
be somewhat different in the two cases, because of the differ- 
ences in the conditions which confront the two producers. The 
competitive producer has two checks on high prices, where the 
monopolist has one. Hence monopoly price is likely to be 
higher than competitive price. A tariff duty which shuts out a 
part of the foreign product removes one of the checks upon 
the power of a monopoly to charge high prices, and changes 
the location of the point of highest net return. 

Can a tariff increase wages? Whether a protective tariff 
can increase the price of labor or not depends first upon 
whether or not it is possible, by means of a tariff, to increase 
the demand for labor relatively to the demand for other factors 
of production. If this can be done, labor will get a larger share 
of the total product of the industry of the community. This 
alone would not prove that the individual laborer would in the 
end be better off. In the first place, the supply of labor might 
increase correspondingly, either through immigration or by 
natural means, and in this event there would be no increase 
in individual wages, even though a larger share of the total 
product did go to the payment of labor. In the second place, 
the tariff might diminish the total product of industry so that, 
even though the laborers did get a larger share of the total, the 
absolute amount going to them as wages might be no greater 
than, indeed not so great as, before. 

As to the first objection, it needs only to be said that if the tariff 
increases the demand for labor, that will tend to raise wages. 
Whether or not this tendency will be counteracted by immigration 
or by natural increase depends upon other conditions. If the 
tariff stimulates immigration or increases the birth rate over what 



PROTECTIONISM 353 

it would be without a tariff, the presumption is that it does so 
because it increases the demand for labor and raises wages, which 
is all that this chapter contends for. Wages may or may not 
be subsequently reduced to the old level by other forces counter- 
acting the tendency of the tariff. As the second condition, it is 
hoped that the third part of this paper will show that a protective 
tariff does not necessarily diminish the total product of industry. 

Owing to the limited space available it is necessary to assume 
two premises as the basis of the argument for the proposition 
that a protective tariff may be so framed as to raise wages 
within the country, (i) The three factors of production — land, 
labor, and capital — are combined in different proportions in the 
production of different commodities. (2) A selected industry 
may be stimulated and made to grow by means of a protective 
tariff. Both these propositions could be proved if space allowed, 
but neither is likely to be disputed by any considerable number 
of people. Assuming them to be true, it is only necessary to 
stimulate, by means of a protective tariff, the production of 
those articles into which labor enters as the principal factor, 
leaving unprotected those industries into which labor enters as 
a relatively less important factor. This is a process of artifi- 
cial selection in which " the variation which makes selection 
possible is found in the different proportions in which the 
three factors are combined in the different industries. The 
favorable variations, from the standpoint of the laboring class, 
are those industries in which labor is relatively the more impor- 
tant factor, and the unfavorable variations are those in which 
labor is relatively the less important factor. In order to favor 
the laboring class it is only necessary to select the favorable 
variations ; that is, to build up by artificial means those indus- 
tries in which labor is the principal factor. Even though this 
should result in a corresponding injury to other industries, 
there would still remain a net gain to labor. 

Let us suppose, by way of illustration, that in industry A, at 
a given period, the best results, from the standpoint of the 



354 



PRINCIPLES OF POLITICAL ECONOMY 



entrepreneur, are ordinarily obtained by combining looo acres 
of land, lo laborers, and ^100,000 worth of capital. These 
yield a product worth ^20,000. In industry B, to get a product 
of the same value, the best results would be obtained from 
combining the factors in the following proportions : 10 acres 
of land, 20 laborers, and ^100,000 worth of capital. Wages 
and interest are assumed to be the same in both industries. 
For the sake of simplicity, capital is assumed to bear the same 
ratio to product in both industries, land and labor being the 
varying factors. By building up industry B, even at the 
expense of industry A, there will result a net increase in 
employment of labor, though a corresponding decrease in the 
employment of land. This increase in the employment of labor 
means an increase in the demand for labor, while the decrease 
in the employment of land means a decrease in the demand 
for land. The result of this situation would be that a larger 
share of the total product would go in the payment of wages 
and a smaller share in the payment of rent. 

In the following tables, I represents the conditions as described 
above ; II, the situation after industry B has been expanded 
50 per cent and industry A has been correspondingly contracted. 





Acres 


Laborers 


Capital 


Product 


Industry A 

Industry B 


1000 
10 


10 

20 


$100,000 
100,000 


$20,000 
20,000 


Totals 


lOIO 


30 


$200,000 


$40,000 


II 




Acres 


Laborers 


Capital 


Product 


Industry A 

Industry B 


500 
15 


5 
30 


$50,000 
150,000 


$10,000 
30,000 


Totals . 


'515 


35 


$200,000 


$40,000 



This shows a decrease of 495 in the number of acres used and an increase 
of 5 in the number of men employed. 



PROTECTIONISM 3 5 5 

We need here to guard against the possibiHty that industry 
B, while using fewer acres of land, might require a kind of 
land that is so very scarce that the rent charge would be higher 
than in A. But this is not a necessary condition. It is quite 
conceivable that the two industries would use the same grade 
of land. It is even conceivable that industry B, in addition to 
using fewer acres, would also use a more abundant kind of 
land, where rents were less per acre. The whole difficulty could 
be avoided by starting with the proposition that in different 
industries rent charges, wages, and interest enter in varying 
proportions. Then, by selecting for governmental favor those 
industries in which wages, rather than rent or interest, form the 
chief item of expense, the total industry of the country would 
be affected favorably from the standpoint of the wage receivers. 

It goes without saying that an entirely different result would 
be obtained by selecting for governmental favor those industries 
in which rent or interest formed the chief item of expense, — 
a result advantageous to the landlord or the capitalist, but dis- 
advantageous to the laborer. It must be confessed also that 
as protectionism has been applied in the past, especially in 
England before the repeal of the corn laws, this result was 
quite as frequently obtained as the other. There is some danger 
also that it will be so in the future, owing to the better lobby- 
ing facilities of the landowning and capitalistic classes. But 
that is another matter. 

Does a tariff favor the less productive industries? The 
proposition that protection attracts labor and capital from the 
more productive to the less productive industries has long been 
one of the basic principles of the free-trade school, — the rock 
on which all protectionist theories were supposed to split. And 
it must be conceded that unless this position can be success- 
fully assailed, the free-trader will always have the advantage in 
the argument. 

The difficulty with the proposition lies in the double mean- 
ing which is given to the word prodtLctive, In order to make 



356 PRINCIPLES OF POLITICAL ECONOMY 

a true proposition of it, that word must be given a certain 
meaning ; but in order to make it a conclusive argument, it 
must have quite a different meaning. From the standpoint of 
the individual business man a productive industry is a profit- 
able 1 industry ; that is, an industry which offers the oppor- 
tunity of making a surplus gain over the cost of running the 
business. From the standpoint of the community a productive 
industry is one which increases the sum total of utilities. It 
is the profitableness of the industry, rather than its productive- 
ness in the latter sense, which causes labor and capital to go 
into it. It is only by defLning prodzictive as ''profitable" that 
one can support the proposition that labor and capital will seek 
those industries which are naturally most productive. In that 
sense, and in that sense alone, it is quite true that protection 
attracts labor and capital from the more productive to the less 
productive industries. 

Meaning of the word productive. But in order to have any 
weight as an argument this proposition must mean that pro- 
tection attracts labor and capital from those industries which 
create more utilities into those which create fewer utilities. 
That is to say, the word productive must mean something 
more than ''profitable." The difficulty could be met only by 
showing that a profitable industry from the standpoint of the 
individual business man is always a productive industry from 
the standpoint of the community. If this cannot be shown, it 
would mean that labor and capital, if left to themselves, will, 
in seeking the largest profits, sometimes go into the less pro- 
ductive industries. There would then be a possibility that 

1 For want of a better term the words profit and profitable are used in 
the more popular sense, which agrees with the use of the terms by the older 
writers on economics. Profit is made to include the surplus income of 
an industry over and above the cost of conducting it. In this broad sense it 
includes rent and every other form of surplus. A profitable industry would 
therefore be one which would yield a surplus income of some kind. This 
surplus is what attracts the director of industry, and it is the surplus-producing 
power of an industry which determines whether or not labor and capital shall 
go into it. ■ 



PROTECTIONISM 357 

protection or some other form of government interference 
might be able to attract labor and capital from a less produc- 
tive industry, into which it would naturally go in pursuit of 
profits, into a more productive industry, from which it would 
naturally have been excluded by the smallness of the profits. 
This possibility would become a reality if the relative profitable- 
ness of the two industries could be reversed by some kind 
of government discrimination. 

The question then becomes. Are the more profitable indus- 
tries always the more productive .? Manifestly not. Saying- 
nothing of certain lines of business which are acquisitive in 
their nature and not productive at all, there are certain highly 
productive industries which have very little power of attracting 
individual enterprise. 

To begin with an extreme case, there is the work of main- 
taining lighthouses. This illustration is chosen, not because it 
is supposed to be typical of those industries which are fitted to 
receive protection, but solely because it serves to make clear 
that there may be a productive industry which offers no induce- 
ments for private enterprise. On the one hand, this work has 
all the earmarks of a productive industry. It produces a real 
utility ; this utility is of a materialistic sort and not moral or 
social, as is that produced by educational and other similar in- 
stitutions ; and it is produced by purely mechanical processes. 
There is nothing in the nature of the utility produced, or its 
processes of production, to distinguish this from any money- 
making business. On the other hand, this industry offers no 
incentive to private enterprise, that is, no opportunity for 
private profits, for the one sufficient reason that the producer 
cannot control his product. It will shine upon those who do 
not pay for it as well as upon those who do. He is therefore not 
in a position to exact a payment for his product corresponding 
to its utility. 

It will doubtless be objected that this is a case calling for 
government ownership and operation rather than protection, 



358 PRINCIPLES OF POLITICAL ECONOMY 

and the point would be well taken. This is a business so com- 
pletely devoid of opportunity for profitable enterprise that no 
kind of protective tariff would be able to make it profitable. 
Nothing but a subsidy could induce private capital to go into 
it, and the subsidy would have to cover the whole cost. In that 
case the government might just as well, it may be maintained, 
own and carry on the business. But the difference between this 
industry and one which would lend itself to protective measures 
is one of degree only. 

Industries differ widely in this particular : whereas one, 
such as the maintenance of lighthouses, produces a utility that 
cannot be controlled at all in the interest of the owner, another 
produces a utility of such a nature that the owner can exact 
full payment from those who use it, while still another pro- 
duces no utility at all, but is purely acquisitive in its nature. 
An example of the last (not to come too near home) would be 
the medieval baron who took possession of a natural ford or 
a mountain pass and set up his castle and went into the busi- 
ness of collecting toll of all who passed that way.^ These three 
industries do not belong to sharply differentiated classes, but 
they shade off gradually into one another. That is to say, there 
is a gradual shading off from the business which creates utilities 
far in excess of any amount which the owner of the business 
can collect, to the business which can collect a revenue far in 
excess of any utility actually created by it. Here again we have 

1 This is a business to which the principle of " charging what the traffic 
will bear " appUes beautifully. What the traffic will bear is, in this case, deter- 
mined by the superiority of the ford or pass compared with the poorest 
ford or pass over which traffic could afford to go. Let us assume that in- 
stead of merely collecting toll the baron spends some trifling sum in the im- 
provement of the passage, still charging what the traffic will bear. His business 
then becomes slightly productive, but its productiveness is small as compared 
with its profitableness. Then let us assume that he gradually increases his 
expenditures for improvement of the passage until the utility created approxi- 
mates more and more nearly to the charges collected ; at each stage of the 
process his business will represent some type of business actually carried 
on among us to-day. 



PROTECTIONISM 359 

a form of variation which makes artificial selection possible, 
the favorable variations being those industries which come 
under the former description. 

No complete harmony of human interests. In considering 
this aspect of economic life too much has been usually assumed 
as to the harmony of human interests. Nothing is more funda- 
mental in economic science than the proposition that there is 
an antagonism of human interests. If there were a complete 
harmony of interests, labor and capital might be expected to 
seek those industries which are most productive from the 
social standpoint. But aside from the observable fact that 
labor and capital do nothing of the kind, it is a matter of 
common observation and experience, confirmed by reflective 
analysis, that there is no such harmony of human interests. 
One man's interest is served by having the labor and capital 
of the community directed in one line, another's by having 
them directed in quite a different line. More than that, there 
is great inequality among individuals in the power of giving 
direction to the industry of the community. The one who 
owns land or capital in addition to his own labor power is in 
better position, other things being equal, to determine the 
direction of business activity than is the one who owns only 
his labor power. We therefore not only have the certainty 
that each individual will try to direct business activity in 
the line most conducive to his own interests, and that in 
many cases his interests will not harmonize with the interests 
of the community, but also the certainty that the power to 
give this direction differs greatly among different individuals. 
If we did not know it as a matter of direct observation and 
experience, we might predict from these premises that the 
business activity of the community would not, in all cases, 
be directed in the most productive lines, and that therefore 
it would be possible, by some form of discrimination, to 
attract labor and capital from the less productive to the more 
productive industries. 



36o PRINCIPLES OF POLITICAL ECONOMY 

The following illustration may add something to the con- 
creteness of this conclusion. Let us suppose that a certain 
tract of land had been devoted to cultivation of a fairly inten- 
sive kind, and had been producing enough to pay the wages 
of twenty laborers, with something left over for rent. Through 
some change of circumstances the price of wool rises, and it is 
found more profitable to use the land for wool-growing. By 
turning the land into a sheep run, nineteen of the laborers 
may be dispensed with, and the saving in wa^es would more 
than measure the difference between the value of the wool 
crop and that of the present crop, so that a larger surplus 
would be left over as rent. There is little doubt that the land 
would then be devoted to the growing of wool. That would 
be to the interest of the landlord and against the interests of 
the nineteen laborers, but the landlord is in a better position 
than they to determine the form of cultivation. There is 
also little doubt that this would be contrary to the interest of 
the community. Less wealth would be produced either for 
consumption or for international trade. Fewer people could 
be supported, or the same number would not be as well 
supported as formerly. 

If the nineteen men thrown out of employment cannot find 
places elsewhere, they will probably, since they want to live, 
offer their labor at lower wages, — enough lower to enable the 
landlord to get as much rent from the more intensive form of 
cultivation as he might get by the less intensive form. Here 
we have the somewhat anomalous situation of an increase in 
price of one of the products of industry causing a fall in the 
price of labor. The key to this anomaly is found in the fact 
that what is cost to one man is frequently gain to another. 
Now in this supposed case (which is not altogether a supposed 
case) there is little doubt that some form of discrimination in 
favor of the present crop and against wool would increase 
not only the relative share of the produce going to labor, but 
the absolute amount of the produce of the land. 



PROTECTIONISM 36 1 

And this is a rule which works both ways. In a community 
where land is extensively cultivated, it is presumably because 
extensive cultivation produces the best results from the stand- 
point of the landowner. Any one of the following conditions 
may induce him to change to intensive cultivation : ( i ) a fall in 
the price of labor ; (2) a fall in the price of the products of 
extensive cultivation ; (3) a rise in the price of the products of 
intensive cultivation. There lies the opportunity for the pro- 
tectionist. By some discrimination which will tend to increase 
the profitableness of the intensive product, or decrease, rela- 
tively at least, the profitableness of the extensive product, an 
absolutely larger and more valuable product might be created. 
This would support a larger number of people, or support 
them better. They would have a larger number of products 
either for consumption or for international trade. Labor and 
capital would have been attracted from the less productive to 
the more productive industry. Since a protective tariff is one 
means by which the relative profitableness of different indus- 
tries may be changed, it follows that a protective tariff may 
be a means of increasing the total product of the industry of 
the community. 



PART FOUR 

THE DISTRIBUTION OF WEALTH 

Which has to do with the shares into which the products of industry are 
divided and the awarding of these shares to different groups and classes 



363 



CHAPTER XXX 

THE LAW OF VARIABLE PROPORTIONS 

The problem of the distribution of wealth is the problem of 
dividing the products of the industry of the community among 
the various classes. The claim of each class to a share of the 
wealth is usually based upon the claim that each has contrib- 
uted something to its production. The contribution may be 
labor, either mental or physical ; it may be capital, or the results 
of foresight or investing ; or it may be land which the owner 
has appropriated or otherwise come into possession of. 

The market value of services. The market value of what 
each has to offer determines his share in the product. If the 
market value of labor is high, the laborer gets a large share ; if 
it is low, he gets a small share. The same is true of that which 
each has to offer. Our first problem must be, therefore, to 
study the market value of each factor, or agent, of production 
in order to find out why the seller of each factor gets a large, 
or a small, share. 

The income of each class, however, is a flow rather than a 
fund or a lump sum. The laborer sells not himself but the 
flow of productive energy which he can exert during a given 
period of time. The capitalist sells not his capital but the flow 
of utilities which come from his capital during a given period 
of time. If the laborer were a slave, he might be sold bodily, 
and in that case he would bring a price. The capitalist and 
the landlord may sell their capital or their land. This involves 
a question of exchange and market price. When they sell the 
flow of utilities which their properties yield, we have interest 
and rent, which are questions of distribution. The following 
outline will indicate the relation of these various problems to 

365 



366 PRINCIPLES OF POLITICAL ECONOMY 

the general problem of valuation .^ For convenience the flow 
of utilities yielded by the various factors of production are 
called services. 

r Consumers' goods 
' Of goods < ( Land 

[ Producers' goods < Capital 
Valuation ■{ \^ Laborers (under slavery) 

r Of land, yielding rent 
Of services < Of capital, yielding interest 
[ Of laborers, earning wages 

Why productive agents are desired. The reason for pay- 
ing for an agent of production is that it helps to produce 
something which is desirable. Its value is derived from that 
of its product. The greater its product, or the greater its con- 
tribution to the joint product of a group of factors, the greater 
its value. It is therefore of the utmost importance that we find 
out, if such a thing is possible, how to determine the contri- 
bution of each factor. This is one of the most elusive problems 
in the whole field of economics. The student is requested to 
study this problem as carefully and intensely as he would an 
intricate problem in physics or chemistry. 

A combination of the factors of production not a chemical 
combination. In Chapter XV we saw the necessity of a proper 
balance, not only among the factors of production but also 
among all the factors of national life. But some variation 
among the factors of production must always be allowed. 
What constitutes the perfect balance depends upon a number 
of considerations which have not yet been discussed. A number 
of factors of production, when used in combination, are not 
like the elements in a chemical reaction or the colors in a pic- 
ture. These probably permit of no variation. The factors of 
production may always be combined in different proportions 
without destroying the result. One can grow a hundred bushels 

^ Compare note by the author on " The Place of the Theory of Value in 
Economics," in the Quarterly Joiirnal of Economics, November, 1962. 



THE LAW OF VARIABLE PROPORTIONS 367 

of wheat in a year by using little land and much labor or by 
using much land and little labor. Which is the more economi- 
cal combination will depend upon the relative cost of land 
and labor. Where land is cheap and labor dear, it pays to use 
much land and little labor ; where land is dear and labor 
cheap, it pays to use little land and much labor. 

In an actual chemical combination the various elements have 
to be combined, apparently, in fixed proportions, without any 
variation whatever. This is known as the law of definite pro- 
portions. But in order to induce a given chemical combination, 
different substances have sometimes to be mixed in considerable 
masses. This gives rise to another law, which is as definite and 
as well understood as the law of definite proportions. 

The law of variable proportions. Take, for instance, the 
juvenile experiment of mixing vinegar and baking soda for 
the purpose of producing a fizz. The actual combination of mole- 
cules which produces the gas that makes the bubbles doubt- 
less follows the law of definite proportions. But not all the 
materials in the mixture will be thus instantly combined. At 
the end of a definite period of time, say a minute, some of 
the acid and some of the soda will remain uncombined, probably 
because a certain number of molecules of each never happened 
to come in chemical contact with the requisite molecules of the 
other. The greater the quantity of vinegar in proportion to 
the soda, the greater the probability that each molecule of the 
soda will come in chemical contact with a molecule of acid. 
Therefore, the greater the proportion of vinegar to soda, the 
greater the proportion of the molecules of soda that will be 
used in the formation of gas, and, conversely, for the same 
reason, the smaller the proportion of the molecules of acid that 
will be used. 

Many factors at work in combination. There are, of course, 
other factors in the problem, such as the size and shape of the 
receptacle in which the mixture is placed, the temperature of 
the mixture, the amount of shaking or stirring to which it is 



368 PRINCIPLES OF POLITICAL ECONOMY 

subjected, as well as the time allowed for the combination to 
take place. Leaving all the other factors unchanged except 
the one selected for experimentation, we get a result similar to 
that which we obtain in some of the larger economic combina- 
tions, such as the application of labor to land. In fact, we are 
here in contact with a universal law which applies to mixtures 
of chemicals, as distinct from chemical combinations, through 
the mixture of fertilizers in the soil, up to the combination of 
various forms of human talent in the promotion of national 
greatness. 

The manufacture of ether. In the manufacture of ethers, 
alcohol is combined with acids much as soda is combined with 
vinegar in the experiment referred to above. After the mixing 
has taken place, only a limited proportion of the original in- 
gredients is actually combined. Since alcohol is expensive and 
the acids cheap, it is found economical to use large * quantities 
of acids in order to force as much of the alcohol as possible to 
combine. The acid is literally massed in its attack upon the 
alcohol, in order that no molecule of the latter may escape. 
In fact, this phenomenon is explained by the so-called mass 
law. If alcohol were cheap and acid expensive, it would then 
be desirable to force every molecule of the acid to combine. 
In order that as few as possible might escape, it would be neces- 
sary to mass the alcohol in its attack upon the acid. An econo- 
mist might not improperly call this an intensive use of acid and 
an extensive use of alcohol. Conversely, the rule actually 
followed of massing the acid upon the alcohol might be called 
an intensive use of alcohol and an extensive use of acid. 

The results of massing one ingredient upon another may be 
illustrated by the diagram which is familiar to all students 
of economics. 

With a given quantity of alcohol let us mix varying quanti- 
ties of acid, which we shall represent on the line OX. The 
quantity of the product, ether, we shall represent on the line 
OY. When a quantity of acid represented by the line OC is 



THE LAW OF VARIABLE PROPORTIONS 369 

put into the mixture, let us assume that we get a quantity of 
ether represented by the rectangle OABC. Twice that quan- 
tity of acid with the same quantity of alcohol will increase the 
product, ether, but will not double it. That is, the product 
increases but does not increase in proportion to the acid. 
Let us suppose that a quantity of acid represented by the line 
OF produces, with the other ingredients, a quantity of ether 
represented by the rectangle ODEF. A third increment and 
a fourth would still result in some additions to the product, as 
long, perhaps, as any of the original quantity of alcohol was 
able to escape the mass action of the acid. Eventually the 
point would be reached when further increases of the acid 
would add nothing 
to the product. 

It will be observed, 
however, that the 
addition of the in- 
crement CF to the 

acid did not add L 1 ± x 

the rectangle CIEF j^.^^^^^ ^ 

to the product. The 

addition to the product is the difference between the rectangle 

OABC Sind the rectangle ODEF. That difference is represented 

by the rectangle CGHF. 

The marginal product. This is technically known as the 
marginal product of the acid. This technical term does not 
mean, however, that even the product CGHF wdiS produced by 
the acid alone ; it merely means that whatever value there is 
in the added product CGHF ^o\i\d be the outside limit of the 
value of the added ingredient CF. 

Air and gasoline in a carburetor. A problem something like 
this presents itself in practical form in the use of air and gaso- 
line in an internal-combustion engine. Both are necessary, 
but they may be mixed in somewhat variable proportions. One 
may use a rich or a lean mixture. A rich mixture is one rich 





D 




/ 


E 
H 


G 





370 PRINCIPLES OF POLITICAL ECONOMY 

in gasoline and lean in air. A lean mixture is one lean in gaso- 
line and rich in air. Combustion itself is a chemical process 
and presumably follows the law of definite proportions rather 
than the law of variable proportions. But the mixture of air 
and gasoline which has to precede combustion is not a chemical 
combination and follows the law of variable proportions ; that 
is to say, not all of both ingredients actually burn, any more 
than all of the ingredients in the manufacture of ether are 
actually combined . A lean mixture masses air on the gasoline 
and enables more of the latter to burn, though much of the 

air is unburned ; a 
rich mixture does not 
mass so much air, 
does not burn so 
much of the gasoline, 
but burns a larger 
proportion of the air. 
If air were expensive 
and gasoline cheap, 
o L Q X 2, rich mixture would 

Diagram B ^^ more economical. 

Since air costs nothing and gasoline is expensive, a lean mix- 
ture is the more economical. The leaner the mixture that can 
be made to explode, the greater the economy of gasoline. It 
wastes air, but that is not bad economy. In short, we try to 
adjust our carburetors so as to approximate as nearly as possible 
to the conditions represented in diagram B. 

Let us assume that a quantity of acid represented by the line 
OL results, under certain conditions of manufacture, in a quantity 
of ether represented by the rectangle OJKL, while a quantity 
represented by the line OQ results, under similar circumstances, 
in a quantity represented by the rectangle OMNQ. But these 
two rectangles are equal ; that is to say, with a quantity of acid 
equal to OL you get precisely the same as with OQ. In short, 
the additional acid, LQ, is thrown away. It is of no use whatever 



K 

N 



22iICTIviTr 



THE LAW OF VARIABLE PROPORTIONS 371 

in that particular mixture, and yet, the acid being all of uniform 
quality, it is as good as any of the rest. The average product, 
however, for that quantity of the variable ingredient would be 
represented by the rectangle LPNQ. It would be foolish to pay 
that much for it, however, or, if it cost as much as that quan- 
tity of ether would sell for, it would be foolish to use so much. 
If, however, it cost absolutely nothing, it might pay to use that 
much, or nearly as much, in order to be sure of getting the 
full use of the alcohol, which is expensive. 

If we were to reduce the broken lines which form the tops 
of the rectangles in the two diagrams, A and B, to smooth 
curves, we should get something like the following : 

As we increase the 
quantity of one ingre- 
dient along the line 
OX, leaving other 
factors unchanged, 
the average produc- 
tivity, that is, the to- 
tal product divided by 
the number of units lagram 

of the variable ingredient, gradually falls. But as long as there is 
any product whatsoever there must be an average productivity 
per unit of that ingredient. This is represented by the descend- 
ing curve YB. But the marginal productivity falls much more 
rapidly and may even become a minus quantity. When so 
much of this variable ingredient is used as to yield the maxi- 
mum total product, and further additions add nothing to the 
total, then these further additions are said to have a marginal 
productivity which is nil. In diagram C the marginal product of 
varying quantities is represented by the line OA. In some mix- 
tures further additions may actually interfere with the work and 
reduce the total product. The curve K4 C represents the marginal 
product under these conditions. In other mixtures the excess 
of the variable ingredient does not become positively detrimental 




X 



3/2 PRINCIPLES OF POLITICAL ECONOMY 

or destructive, but merely neutral. In such cases its marginal 
productivity becomes nil but never a minus quantity. The curve 
VA C in diagram C, in order to represent this class of cases, 
would have to be redrawn. It should never fall below the line OX. 

Reversing the experiment gives corresponding results. If now 
we change the experiment and introduce varying quantities of 
the other ingredient in the mixture with a fixed quantity of 
the ingredient which we have been considering as the variable 
factor, we shall get results which harmonize perfectly with 
those which we have been getting. Returning to the case of 
alcohol and acid in the making of ether, let us start with a 
quantity of acid represented by the line OL in diagram B. 
According to our assumption as explained earlier, that quantity 
of acid with the original quantity of alcohol produced no more 
ether than a slightly smaller quantity of acid represented by the 
line OL. If now we mix a quantity of acid equal to OL with 
enough more alcohol to bring the mixture to the same pro- 
portions as in the original mixture when OL acid was used, 
the product, ether, will increase in exact proportion to the in- 
crease in the alcohol, provided, of course, the reaction is not 
hindered by the smallness of the receptacle or by some other 
extraneous circumstance. 

To use, for example, a fixed quantity of air for each explosion, 
but a larger quantity of gasoline, would require a larger cylinder. 
Making such necessary allowances, we can say that if the 
maximum amount of air in a gasoline engine is used with a 
given quantity of gasoline, so that more air would be of no 
advantage whatever, then a little more gasoline could be intro- 
duced and would add considerably to the power. There being 
enough air in the mixture to get the maximum combustion of 
gasoline, the power would for a time increase in proportion to 
the gasoline. As more and more gasoline is introduced, how- 
ever, with a fixed quantity of air, making the mixture gradually 
richer, a smaller and smaller proportion of gasoline will be 
burned because of a scarcity of air. If the mixture is made 



THE LAW OF VARIABLE PROPORTIONS 373 

rich enough, a point will be reached when further additions of 
gasoline will add nothing whatever to the power. The marginal 
productivity of gasoline is then nil. When the mixture gets so 
rich that it will not explode, it reduces the power, and the 
marginal productivity of gasoline becomes a negative quantity. 

The marginal product of each factor the complement of 
that of the other. The marginal productivity of each factor in 
the combination is, it will be observed, the complement of that 
of the other factor. When the proportions are such that the 
marginal productivity of one is nil, that of the other is one 
hundred per cent of the average product ; that is, the total 
product increases in exact proportion as this factor is increased. 
When the proportions are such that the marginal product of 
one factor is low, that of the other is high, the sum of the two 
marginal products always equaling the total product. 

When there are more than two factors in the compound, the 
problem becomes more complicated, but the principle is the 
same. In such a case it is better to treat each one separately, 
regarding all the others as a bunch, or cluster, and thus 
treating them as one. Marshall has suggested the word dose 
to designate a group of factors. Thus, if we were considering 
nitrogen, phosphorus, potassium, and all other factors in soil 
fertility, we could take all the factors except, say, nitrogen and 
treat them as constants. By varying the nitrogen in the com- 
pound, we get variations in the crop yields. 

Rothamsted experiments. Experiments of this kind have 
actually been carried on at the Rothamsted Estate, near 
London, wherfe the great work inaugurated by Sir John Lawes 
has been carried on for many years. In one experiment, for 
example, five plots of land of approximately equal fertility were 
treated alike in all particulars save one. Different quantities 
of nitrogen were applied in the fertilizer. Forty-three pounds 
were applied to one ; 86 pounds to another ; 1 29 pounds to 
another; and 172 pounds to another. The following table 
shows the results : 



374 PRINCIPLES OF POLITICAL ECONOMY 

TABLE II 







Average Yield 


Gain for 


Plot 


Fertilizer 


IN Bushels for 


43 LB. OF 






Eight Years 


Nitrogen 


No. 5 


Mixed minerals alone 


19 




No. 6 


Mixed minerals plus 43 lb. nitrogen 


27I 


H 


No. 7 


Mixed minerals plus 86 lb. nitrogen 


35i 


7f 


No. 8 


Mixed minerals plus 129 lb. nitrogen 


36I 


If 


No. i6 


Mixed minerals plus 172 lb. nitrogen 


371 


f 



According to this table the yields show diminishing returns 
for each successive dose of 43 pounds of nitrogen. The gain 
on Plot No. 16 over Plot No. 8 was so slight, being only five 
eighths of a bushel, as to be obviously unprofitable. Therefore 
this plot was discontinued at the end of eight years, but the 
other four were continued for forty-eight years, with the fol- 
lowing results : 

TABLE III 



Plot 


Yield in 
Bushels 


Gain for 43 lb. 
Nitrogen 


]\[o 5 


15 

24 

33 
36f 






No 6 


9 


No 7 


9 


No 8 


3f 







The number of plots is too small to be finally conclusive, 
but so far as they go they show interesting results. The first 
two doses of 43 pounds each, on Plot No. 6 and Plot No. 7, 
show constant returns, and the third dose, on Plot No. 8, 
shows sharply diminishing returns. Allowing $6.50 as a fair 
price for 43 pounds of nitrogen, and $1 as a fair price for a 
bushel of wheat, we get the following results : 

1 These tables are presented in the excellent article by Eugene Davenport, 
in Bailey's Cyclopedia of American Agriculture, The Macmillan Company, 
New York. Compare also the author's volume " Principles of Rural Eco- 
nomics," pp. 183-184, Ginn and Company, Boston, 191 1. 



THE LAW OF VARIABLE PROPORTIONS 375 
TABLE III 



Plot 


Yield in 
Bushels 


Gain for 

43 LB. 

Nitrogen 


Value of 
Gain 


Cost of 
Gain 


Profit or 
Loss 


No. 5 

No. 6 

No. 7 

No. S 


15 
24 

33 
36f 


9 
9 

3f 


$9 
9 
375 


$6.50 
6.50 
6.50 


$2.50 profit 
2.50 profit 
2.75 loss 



If the price of wheat were ^2 a bushel, the net gains would 
have been ^11.50 on Plot No. 6, ^11.50 on Plot No. 7, and 
^i on Plot No. 8. In other words, the last dose of 43 pounds 
of nitrogen would have paid a profit of $1 instead of a loss 
of $2.75. But if the price of wheat had been 50 cents a 
bushel, nitrogen costing the same, there would have been 
a loss on every dose of nitrogen. 

Problems to be worked out. These tables present a number 
of interesting problems which the student may work out for 
himself. Taking Tables II and III as a basis, the following 
problems are suggested : 

1. With 43 pounds of nitrogen costing ^6.50, at what aver- 
age price must wheat sell in order that the farmer may come 
out just even, with neither profit nor loss, on the third dose 
of 43 pounds of nitrogen (Plot No. 8) ? 

2. With wheat selling at ^i a bushel, at what price must 
43 pounds of nitrogen sell in order that the farmer may 
come out even on the same plot with the same application 
of nitrogen .? 

We may, without doing violence to language, turn about and 
speak of ''applying" doses of land-plus-other-factors to nitro- 
gen. Let us start with 129 pounds of nitrogen, to which one 
plot, or dose of land-plus-other-factors, is applied, yielding, 
according to Tables II and III, 36| bushels. Adding two 
more plots to this combination, that is, spreading our 1 29 pounds 
of nitrogen over three plots instead of one, we get a much 
larger crop. Assuming that Plot No. 6 is exactly equal to Plot 



376 PRINCIPLES OF POLITICAL ECONOMY 

No. 8, we get 72 bushels ; that is, on Plot No. 6 one dose 
of nitrogen with one dose of land-plus-other-factors yields 
24 bushels according to our tables. Three doses of 43 pounds 
of nitrogen added to three doses of land-plus-other-factors 
should give us three times as much, which makes 72 bushels. 

Since three doses of nitrogen with one dose of land-plus- 
other-factors yields 72, it follows that the adding of two doses 
of land-plus-other-factors added 35I bushels. 

A larger number of experiments of the same kind needed. 
We have not plots enough to carry this analysis much farther, 
but it is probably clear enough by this time that wherever, by 
varying the ratios in which different factors are mixed in any 
productive combination, we get varying results, any economist 
who is not willing to consider the relation of the variation in 
the factors to the variation in the product is not much of an 
economist. It must also be apparent by this time that the rela- 
tion between the variation in the quantity of any factor in the 
combination and the variation in the product must have a great 
deal to do with determining the value of the factor. 

This method gives the key to all correct valuation. Earlier 
in the chapter the term marginal productivity was applied to 
the variation in the product which followed a minute variation 
in the quantity of any factor in the combination. In each of 
the Tables I, II, III the figures in the third column would be 
called the marginal product of nitrogen. Objection has occa- 
sionally been raised to the use of the word prodttct in this 
sense. It is contended that even these increments of product 
are not in any sense the exclusive product of the 43 pounds of 
nitrogen which were added in order to get that increment, — 
that 43 pounds of nitrogen, alone and unrelated to the other 
factors, would not produce even the small increments of wheat 
indicated in the third columns. No one, of course, claims that 
they would or could. It is not worth while to discuss this or 
that possible meaning of the word product or productivity. 
The essential thing to consider is, How much could a farmer 



THE LAW OF VARIABLE PROPORTIONS 377 

afford to pay for a given quantity of nitrogen to be used in 
a given combination ? It is obvious that this must depend 
on the way it would affect the crop. How much more wheat 
could he grow by using more nitrogen, or how much less 
would he grow by using less ? There is no question more 
practical than that. It is, moreover, a question which must 
be raised with respect to each and every factor in that combi- 
nation of factors called a farm, or in any other business 
establishment. It is in the answers to such questions that we 
must find the key to any clear understanding of the problem 
of the distribution of wealth, which is, as pointed out in the 
beginning of this chapter, the problem of the valuation of 
the factors of production. 



CHAPTER XXXI 

THE GENERAL NATURE OF THE WAGE QUESTION 

How intensely is a man's labor desired ? The price of 
labor, like the price of commodities, depends upon how 
much it is desired in comparison with other things. It is 
important in discussing wages, as in discussing the price of 
commodities, that we remember that it is not labor in general, 
but specific units of labor, which are purchased. The question 
is not how intense is the need or desire for labor in general, 
nor how great would be the loss if all labor were wiped out 
of existence. The question is how intense is the need for a 
given number of units of a given kind of labor, or how great 
would be the loss if that given number of units were subtracted 
from the total supply. In the case of labor, as in the case 
of commodities, the practical, everyday question, on the part 
of the prospective purchaser, is, How much do I need this 
particular article or the labor of this particular man ? How 
much better off shall I be with the advantage of his help than 
without it ? 

The need for more labor, rather than the absolute need for 
labor. It may be true that if there were no labor of a given class, 
say that of ditch diggers, the community would suffer terribly. 
Nevertheless, there may be so many ditch diggers that the 
addition of one to the total number would add very little to, 
and the subtraction of one would subtract very little from, the 
well-being of the community. When this is the case, the labor 
of any one of the total number will not be very much desired. 
Would-be employers will be somewhat indifferent to his offers 
to help and to his threats to stop working or to emigrate. 
The indispensable man, like the indispensable commodity, 

378 



GENERAL NATURE OF WAGE QUESTION 379 

commands the high price. The man who can be easily spared, 
Hke the superfluous commodity, brings the low price. 

This may be called the functional theory of wages, and it 
forms a part of the functional theory of value which was out- 
lined in a previous chapter. The functionj)Xa_Jiigh price, in 
the economy of the nation, is to call into existence a larger 
supply of the tiling for which it is offered. The function of 
a low price is to discourage the production and reduce the 
supply of the thing for which it is offered. If a larger supply 
is desired or needed, a high price is the means of getting it. 
If a larger supply is not desired or needed, a low price is the 
means of checking, limiting, or reducing the supply. Find 
out, in any given case, how much better off a community 
would be, or thinks it would be, if it had more of a given 
thing than it now has, and you have a fair measure of the 
reward which it could afford, or thinks it could afford, to pay 
in order to get more. 

Stated negatively, find out how much worse off the com- 
munity would be, or thinks it would be, if it were to lose 
a unit or a few units of its existing supply of a given thing, 
and you have a measure of what it could afford, or thinks it 
could afford, to pay rather than to incur that loss. If it thinks 
it would make a great difference one way or the other, a high 
price will be offered. If it thinks it would make very little 
difference, a low price will be offered. This applies to the 
price of labor as well as to the price of commodities, and for 
the same reason. 

In the case of labor, as in the case of commodities, the 
community may be sadly mistaken. It may fail to appreciate 
real merit, and it may greatly overrate certain qualities in either 
case. There is no going behind the returns in a verdict of this 
kind any more than in a popular election. 

Again, there may be members of the community who desire 
intensely to possess a certain commodity, or to hire a certain 
kind of labor, but who have not the wherewithal to purchase or 



38o PRINCIPLES OF POLITICAL ECONOMY 

hire it. They will therefore have little influence on the price 
or the wages. This impecunious condition may be due to the 
fact that others have no great desire for the labor or the prod- 
ucts of the persons in question. In that case the community 
does not value their services very highly, and therefore their 
desires have little influence on the market for other things or 
other services. 

Productive labor is wanted because of its product. Our next 
task is to find out what determines how much the labor of any 
particular man or group of men is wanted. In the simplest 
possible case, — that of a laborer who, without any help from 
anybody else, produces a complete article, — his labor is needed 
just as much as, and no more than, the article itself is needed. 
The price of the article, then, is his reward. If he is not satis- 
fied with his income, he must find fault with the price which 
the consumer pays for the product, for he gets the whole 
price. This, however, is a case so simple as to be very excep- 
tional. Very few finished products are produced by the labor 
of a single person. One who goes out into the woods and 
gathers nuts or berries, carries them in vessels which he has 
himself improvised, and sells them directly to consumers may 
come under this class. The woodsman who goes into the pri- 
meval forest and chops wood will at least have an ax ; this 
ax is likely to have been made by somebody else. He will 
probably also need a team, which may have been grown or pro- 
duced by somebody else. While it is not strictly true that in 
a case of this kind the finished product, firewood, is produced 
by the labor of one man, still the problem in distribution is 
fairly simple. If the woodman has paid a fair price for his 
ax, the question of distribution as between him and the ax- 
maker is settled and does not need to bother us any more. 
If he likewise pays a fair price for his team and wagon, the 
problem of distribution as between himself and the horse 
breeder and wagon maker is also settled and need not bother 
us again. Since he has paid for his tools, the total value of 



GENERAL NATURE OF WAGE QUESTION 381 

the wood which he cuts and hauls to town is his reward, and 
there is no further problem in distribution. But the further 
we proceed with our study, the more complicated the problem 
will become, for we shall find that in the great majority of cases 
the product is the joint product of a large number of people. 

Goods generally produced by the joint labor of a num- 
ber of persons. We are sometimes told that most goods are 
socially produced. This is a rather impressionistic statement ; 
it may do no harm, but it is liable to misinterpretation. It 
would be better to say that most goods are produced by the 
joint efforts of several persons. The total reward which can 
go to all of them cannot in the long run exceed the total 
value of the finished product. This must be divided among 
all those who have participated in its production. The price 
of the loaf of bread must reward all those who have had any 
part in its production, including the baker, the miller, the 
various transportation agencies, and the farmer, as well as 
the manufacturers of the farmer's, the baker's, and the miller's 
tools, and so on back to the lumbermen and the miners who 
extracted the raw material out of which the tools were made. 

The successive division of labor does not create a very 
difficult problem in distribution. We find here that we are in 
contact with what, in a previous chapter, has been called the 
division of labor. This is, as already pointed out, of two 
kinds : contemporaneous and successive. We have the suc- 
cessive division among the farmer, the miller, the railroad, 
and the baker, since, one after the other, they work upon the 
same material. We have an example of the contemporaneous 
division of labor in the case of the mill owner and his em- 
ployees of various kinds, the farmer and his hired men, the 
railroad company and its employees, and so on. The problem 
of distributing the price of the finished product among those 
who work upon the raw material in regular succession is 
simply a problem in the price of commodities. Thus, the 
reward of the farming group comes to them in the form of 



382 PRINCIPLES OF POLITICAL ECONOMY 

the price of wheat. This price must then be distributed among 
the contemporaneous workers on the farm, that is, the farmer 
himself and his hired men. The difference between the price 
of wheat and the price of flour and its by-products must fur- 
nish the reward for the milling group, and the difference 
between the price of flour and the price of the bread must 
furnish the total reward for the baking group. 

All this is fairly simple and leads to no serious social problem. 
Of course the farmer would like to get a higher price for his 
wheat, and the miller would like to get it at a lower price, 
and each one may from time to time accuse the other of try- 
ing to manipulate the price ; but it is a question of market 
price, and therefore society in general has not taken up the 
quarrel. Similarly, the miller would like to get a higher price 
for his flour, and the baker would like to get it at a lower 
price. This conflict of interests, however, does not now create 
what is known as a social problem. The commodity market is 
supposed to take care of it, and social reformers in general 
have not exercised themselves to any great extent on the 
subject. Occasionally, of course, someone is acccused of corner- 
ing wheat or manipulating the price of flour. Similarly, the 
baker would like not only to get his flour cheaper, but also 
to sell his bread at a higher price. This, again, is taken care 
of by the commodity market. 

When bakers are accused of manipulating price, as is not 
infrequently done by dissatisfied consumers, no great social 
problem is supposed to be created. There have been historic 
occasions, of course, when mobs of irate consumers have 
hanged bakers to their own lamp-posts because the price of 
bread was higher than the consumer liked to pay. They have 
not always stopped to consider how much the baker had to 
pay for his flour, or the miller for his wheat, or how hard a 
time the farmer has had in growing his wheat, owing to bad 
weather and pests of various kinds. All that the irate con- 
sumers realized was that the price of bread was higher than 



GENERAL NATURE OF WAGE QUESTION 383 

they were accustomed to paying, and the unfortunate baker 
was the only one within their reach upon whom they could 
wreak their vengeance. 

The division of the product among contemporaneous workers 
the difficult problem. The great social problem of to-day, so 
far as it relates to the distribution of wealth, is the problem of 
distributing the price of the product among the contempora- 
neous workers. Of the total price of wheat, how much should 
go to the landowner (if he is a different man from the farmer), 
how much to the farmer, how much to the laborer, how much 
to the capitalist (if he is a different man from the farmer) ? Or, 
again, of the total spread between the price of wheat and the 
price of flour, which furnishes the total reward to the milling 
group, how much should go to the capitalist, how much to the 
owner of the mill site, how much to the manager, and how 
much to the various types of laborers ? And so on through 
the transportation groups and the baking groups, the difficult 
problem is always that of the distribution of the total earnings 
of the group among the contemporaneous workers within it. 

Not much headway can ever be made in the study of this 
problem unless we hold carefully in mind the law of variable 
proportions as explained in the last chapter. When it is sug- 
gested, for example, that each factor of production should be 
paid for in proportion to its contribution to the product, any 
student who does not understand the law of variable propor- 
tions is likely to say that there is no way of finding out what 
each factor contributes. He will say, for example, that it is 
like trying to find out how much of the welding is done by 
the anvil and how much by the hammer, or how much of the 
cutting by the upper and how much by the lower blade of the 
scissors. To use this comparison is to show that one does not 
understand the problem. If one blade of the scissors were a 
little longer than the other, it would not require any so-called 
metaphysical or theoretical reasoning to see that the scissors 
might be improved by lengthening the shorter blade. If two 



384 PRINCIPLES OF POLITICAL ECONOMY 

workmen were to offer their services, one to lengthen the 
longer blade and one to lengthen the shorter blade, it would 
not take much of a theoretician to decide which workman it 
would be better to hire. The workman who would lengthen 
the shorter blade would add somewhat more to the cutting 
power of the scissors than the workman who would lengthen 
the longer blade. 

Most economic problems, as pointed out many times already 
in this volume, relate to the problems of more or less, of im- 
provement or deterioration, of readjustment of existing , equip- 
ment, organization, etc. If the blacksmith were ever called 
upon to decide whether to get along with an anvil without 
any hammer, or with hammers without any anvil, there might 
be some point to the comparison. The question which he has 
to decide is how to balance up his equipment so as to have 
hammers and anvils well adapted to one another. If he were 
to find that he could improve his work slightly by having 
another hammer, but that he could gain nothing by buying 
another anvil, there is not much doubt that he would be more 
likely to spend money on hammers than on anvils. He would 
not spend much time puzzling over the abstract question as to 
whether hammers or anvils were the more productive. Simi- 
larly, if a farmer found that he could increase his crop more 
by having extra help than by having more land, he would be 
more likely to offer wages to someone than to offer rent to 
someone else. If farmers generally felt that way about it, 
wages would be high and rent low. Under the opposite 
conditions rent would be high and wages low. 

Under the law of variable proportions, or that special phase 
of it known as the law of diminishing returns from land, it is 
actually found that in a community where there is an abundance 
of good land but a scarcity of labor to work it, one or more 
laborers added to the existing number makes a considerable 
difference in the crop. That is a sufficient reason for paying 
high wages to labor. Additional laborers are very much needed ; 



GENERAL NATURE OF WAGE QUESTION 385 

the agricultural situation would be very much improved by 
having more laborers and would be very much injured if any 
were lost. The question of more laborers or of fewer laborers 
is one of considerable importance. 

On the other hand, where land is so abundant and laborers 
so few that it is difficult to cultivate the existing land, it would 
not be of much advantage to production to have a few more 
acres, nor much of a disadvantage to have a few less. The 
question of more or less is not, in this case, very important. 
This is the question which presents itself to the practical farmers. 
The question as to which is absolutely more important, land or 
labor, is a question which occurs only to armchair philosophers. 
This would be in all respects like the question as to which does 
more of the cutting, the upper or the lower blade of the scissors. 

Shares generally divided into wages, rent, interest, and profit. 
It simplifies the problem somewhat to classify those who take 
part in the contemporaneous division of labor according to the 
functions which they are supposed to perform. It is customary 
to divide them into four main classes. The first class is made up 
of the laborers, who work either with their hands or with their 
heads, and receive their share in the form of wages or salaries 
(for the sake of simplicity, salaries are, in this chapter, in 
eluded under wages) ; the second class is made up of the land- 
owners, who furnish the land and receive rent ; the third class 
is made up of the capitalists, who supply the capital and receive 
a reward in the form of interest ; and the fourth class is made 
up of the independent business men, who undertake to assemble 
all the other factors, — who take the chief risks of the enterprise, 
and receive whatever is left over after all the others are paid, 
and call it profits. 

Any or all of these functions may be performed by, and any 
or all of these shares may go to, the same man. In many small 
enterprises the independent business man does his own work and 
is therefore a laborer, owns his own land and is therefore his 
own landlord, and furnishes his own capital and is therefore 



386 PRINCIPLES OF POLITICAL ECONOMY 

his own capitalist. A very large proportion of the total busi- 
ness of the nation is done in this way. The typical farm in 
the northern half of the country comes under this description, 
as do also many small shops and stores in country towns, and 
a few even in the larger cities. But even the farmer, as well 
as any other business man who does a part of his own work, 
may hire additional help and pay wages, though getting wages 
for himself. He may also rent additional land, though owning 
some land of his own and getting rent for it. He may borrow 
additional capital, though owning some capital of his own and 
getting interest on it. In fact, we can find every possible varia- 
tion, from the enterprise where every function is performed by 
the same man to that where no one performs more than a 
single function. An example of the latter would be the enter- 
prise where laborers do all the work and receive nothing but 
wages or salaries, where someone else is the landowner, and 
furnishes nothing but land and receives nothing but rent, where 
another man, or group of men, furnishes nothing but capital and 
receives nothing but interest, and where still another man, or 
group of men, assumes the risks of the enterprise, invests the 
borrowed capital on the rented land, hires the labor, and under- 
takes to find sale for the products. In this chapter we are 
concerned with the income which pays for the function of 
the laborer. Wages are the price which is paid to call forth the 
necessary quantity of productive labor. 

We may say in general that when one factor of production 
is oversupplied in proportion to the others which need to be 
combined with it, the question of getting more of it, or even 
of maintaining the existing supply, becomes unimportant. Ac- 
cordingly not much will be paid in order to get more of it, 
or even to hold the existing supply. But when any factor is 
undersupplied in proportion to the others which have to be com- 
bined with it, the question of getting more of it, or of holding 
the existing supply, becomes very important. Accordingly a 
high price will be offered for it. 



GENERAL NATURE OF WAGE QUESTION 387 

This principle applies not simply to land, labor, and capital, 
but to the different kinds of each. If there is a scarcity of 
skilled labor in proportion to the unskilled labor which has to 
be combined with it, it becomes very important to get more 
skilled labor, or at least to keep some of the existing supply 
from going elsewhere. In that case a high wage will be offered 
for skilled labor. Under the same conditions there is, of course, 
a large supply of unskilled labor in proportion to the skilled. 
It is therefore not very important that there should be more 
unskilled labor, nor even that the existing supply should be 
kept from diminishing. Not much is likely to be paid, under 
such conditions, for unskilled labor. 

The next question is, What determines the relative supply 
of the various factors of production ? 



CHAPTER XXXII 

WHAT DETERMINES THE RATE OF WAGES? 

Causes of differences of wages in different occupations. Let us 

consider, first, the causes of the difference of wages in different 
occupations. If, in order to get efficient production, it is found 
necessary to have a high degree of specialization, many differ- 
ent kinds of skill will be found in the same establishment, 
each kind contributing its share toward the production of the 
same product. Men possessing these different kinds of skill 
will be needed in slightly variable, but fairly definite, proportions. 
In the production of cloth, for example, spinners and weavers 
will be needed in fairly definite proportions. If by any accident 
it could happen that for a period of time there were more 
spinners than were necessary to supply yarn for the weavers,^ 
the value of each spinner would be considerably reduced. 
Under these conditions, if they could exist, it would be literally 
true that a few less spinners would be little loss, provided the 
remaining spinners could still supply all the yarn the weavers 
could use. On the other hand, the labor of each weaver would 
be of considerable value. 

Since there would not be weavers enough to use all the yarn 
that could be produced, one less weaver would reduce the total 
production of cloth, and one more weaver would add to the 
total production, assuming that machinery and room were avail- 
able. Under these conditions there would grow up in any free 
community a difference in wages in favor of the weavers and 
against the spinners. This would be called the law of supply 
and demand, but this law rests back on certain fundamental 
advantages and disadvantages. The addition to the total output 

1 Compare Chapter XVIII. 



WHAT DETERMINES THE RATE OF WAGES? 389 

of cloth which would result from an increase in the number 
of weavers would really be much greater than the addition 
which would result from an equal increase in the number of 
spinners. This would be a sufficient reason why a higher price 
should be offered for the labor of weavers than for that of 
spinners. In the absence of compulsion, that would be the 
only way of attracting more weavers and fewer spinners. 

Of course this condition would soon correct itself. If the 
wages of the weavers were allowed to go up and the wages of 
the spinners to go down, some of the spinners would have an 
excellent reason for changing their occupation. If they could 
not easily do so, the oncoming generation of laborers, who 
have to choose between the occupation of weaver and that of 
spinner, would be attracted into the one where the wages were 
higher, and thus restore the equilibrium. But if wages were 
not allowed to readjust themselves, and, through some compul- 
sion on the part of the government or some other agency, all 
mills were forced to pay as high wages for spinners as for 
weavers, and to hire all who applied, then there would be no 
reason why the oncoming generation should go into the occu- 
pation where they were most needed. They would simply 
choose the one where the work was most agreeable. There is, 
therefore, a genuine social utility to be achieved by the differ- 
ence of wages which would grow up under the law of supply 
and demand. It would tend to attract laborers into the occupa- 
tion where more men were needed and to discourage them 
from entering the occupation where more men were not needed. 
This will be found to be the fundamental reason why wages 
are as a matter of fact higher in some occupations than in others. 
Where the ordinary processes of bargaining are not interfered 
with, wages tend to be high in those occupations where more 
men are needed, and needed badly, and low in those occupa- 
tions where more men are not needed, or not needed badly. 
The function of these differences of wages is to restore the 
equilibrium between different occupations. '^ 



390 PRINCIPLES OF POLITICAL ECONOMY 

Cost of acquiring skilL If there is some permanent obstacle 
in the way of a free choice of occupations, there may be a per- 
manent difference in the wages in different occupations, based 
upon an undersupply of labor in one and an oversupply in 
another. If, for example, a certain occupation requires a kind 
of skill which is not widely distributed or easily acquired, 
whereas another occupation requires a kind of skill which mul- 
titudes of people possess or can easily acquire, there is likely 
to be a permanent undersupply of the one kind of labor and 
a permanent oversupply, at least relatively, of the other. The 
cost of training or the difficulty and irksomeness of the neces- 
sary study and practice will serve to limit the number of people 
who succeed in entering the highly skilled occupations. 

In this respect the cost of acquiring the necessary skill acts 
very much as the cost of producing a material commodity. As 
the price of the material commodity must be high enough to 
cover the cost or to overcome the disinclination to the work 
of production, so the wages of labor in a highly skilled occu- 
pation must be high enough to pay the cost of acquiring the 
skill or to overcome whatever disinclination there may be to the 
preliminary work of study and practice. If this cost is high, 
the wages must be correspondingly high. If the cost is very 
low, so that practically no one is deterred from entering the 
occupation, the wages will be correspondingly low. 

Some skill is absolutely limited. There may, however, be 
certain kinds of skill which are so scarce as to be almost in- 
capable of being increased. Certain kinds of work may require 
a man of genius rather than a man of training. But in most 
cases it will be found to be a matter of training. An indefinite 
number of men could be trained for almost any occupation if 
the wages were only high enough to furnish a sufficient in- 
ducement. This, however, will depend somewhat upon the 
opportunities for education and training. Under a system of 
free public education the cost of training is greatly reduced and 
should naturally greatly increase the supply of highly skilled 



WHAT DETERMINES THE RATE OF WAGES? 391 



labor. Where the money cost of education is eliminated, the 
only cost remaining is the irksomeness of hard study. Those to 
whom this irksomeness is very slight will naturally be attracted 
into the more highly paid occupations. There may, however, 
be artificial restrictions in the way of entering certain well- 
paid occupations. If a group of laborers in one of those few 
occupations where something resembling the apprenticeship 
still prevails, would limit the number of apprentices, that 
would of course limit the number of laborers who could ac- 
quire skill enough to follow the occupation. In other cases 
the policy of the closed shop might be carried to such an 
extreme as to reduce the supply of labor in the given occu- 
pation, and thus prevent the readjustment of the labor supply 
to meet the demand. The tendency of freedom, however, is to 
encourage the automatic readjustment of the supply of labor 
to the demand. 

' Fatigue 
Disinclination to Long hours 
work because of 1 Loss of opportunity for 
pleasure 

Disinclination to f A high standard of living 
multiply because < Late marriages 
of 1^ Birth control 

In the unskilled |' Women 

trades " Exclusion of < Children 

I Men of other races 



Causes 

OF THE 

Scarcity 
OF Labor 



In the skilled 
trades 



Restriction of immigration 
Encouragement of emigration 

rWar 
Destruction of life through -j Pestilence 

^ Famine 
Rarity of genius 
Expenses of education 
Disinclination to study 
Reduction of number of apprentices 
Closed shop 



392 PRINCIPLES OF POLITICAL ECONOMY 

These are the principal factors which determine the excess 
in wages of the skilled trades and occupations and the learned 
professions over and above those paid in what are known as 
the unskilled occupations. By the unskilled occupations is 
meant, however, those which require a kind of skill which 
practically everybody can acquire without much special study. 
There is skill involved in the handling of a spade or a wood- 
man's ax, as any inexperienced person will find if he tries to 
use one or the other effectively ; but it is a kind of skill which 
large numbers of people acquire easily, and therefore the supply 
of such skill is so great as to keep wages down pretty close to 
what is known as the standard of living. We have, therefore, 
the problem of finding out what determines the wages of this 
general mass of unskilled labor. What is there here which 
corresponds to the cost of producing a material commodity or 
the cost of acquiring the skill required in one of the well-paid 
occupations ? The factors which take the place of cost of pro- 
duction here are, first, the disinclination to work, and, second, 
the disinclination to multiply. 

Scarcity of unskilled labor. Among the vigorous Euro- 
pean and American stocks the disinclination to work is not 
so very great. Nevertheless, there is an appreciable quantity of 
labor which is chronically withdrawn from productive work by 
reason of this factor. That part of the leisure class which is 
made up of people who have inherited, married, or otherwise 
come into possession of sufficient wealth to enable them to 
live without work, show this disinclination rather clearly. 
There are also the chronic loafers, the tramps, and the 
nomadic element among us, who show a strong disinclination 
to work, and only do so under strong temptation. 

The disinclination to multiply is unfortunately strongest 
among those who possess the most forethought. Those who 
live only in the present, who have no regrets for yesterday 
and no fears for to-morrow, generally give way to their primal 
impulses and multiply almost as rapidly as is physiologically 



WHAT DETERMINES THE RATE OF WAGES? 393 

possible. Those, however, who look to the future, not only 
of themselves but of their children, who foresee the disadvan- 
tages which their children will suffer if they are . insufficiently 
nourished or inadequately educated, generally have smaller 
families than are physiologically possible. The multiplication 
of numbers among such people becomes in part a moral process 
instead of a purely animal process. Family building takes the 
place of spawning. Marriages of those who take thought for 
the future are postponed until they are able to support and 
educate their children. 

The group of motives and factors which serve to hold the 
procreative instincts in check are generally called by the name 
of the standard of living. This is a somewhat technical term 
in economics and requires some careful explanation. 

Meaning of the standard of living. Technically the term 
standard of living means the number of desires which, in the 
average person of the class in question, take precedence over 
that group of desires which result in the multiplication of num- 
bers. For purposes of discussion we will call the latter group 
of desires the domestic instincts. When the domestic instincts 
act powerfully and without opposing motives to hold them in 
check, the individual will undertake the support of a family 
before he is assured of a sufficient income to satisfy any but 
the most elementary desires. Under these conditions he is said 
to have a low standard of living. In his case there are very 
few other desires which take precedence over the domestic 
instincts. The individual of whom that is true will accordingly 
marry and undertake the support of a family as soon as he has 
sufficient income to satisfy that other small group of desires. 
In other cases a large number of other desires take precedence 
over the domestic instincts. An individual of whom that can 
be said will not marry and undertake the support of a family 
until he feels reasonably certain of being able to satisfy all 
these other desires. He is said to have a high standard of 
living; that is, an expensive standard. 



394 PRINCIPLES OF POLITICAL ECONOMY 

If we can imagine a community to which immigrants from 
the outside do not come, and in which the average unskilled 
laborer has a high standard of living, we will have a com- 
munity in which the average laborer will not marry and under- 
take the support of a family until he is sure of wages high 
enough to satisfy a large number of desires. If the average 
individual, however, has a low standard of living, he will marry 
and undertake the support of a family on low wages ; that is, 
wages that are just high enough to secure him the means of 
satisfying a small group of desires. If the unskilled laborers 
of the community have a high standard of living, the average 
age of marriage will be a little higher and the average size of 
the family a little smaller, so that the rate of multiplication will 
be materially slower than would be the case if they had a low 
standard of living. The rate of multiplication being slower, the 
oncoming supply of labor is less, and in the succeeding genera- 
tions laborers will thus be able, through the smaller supply, to 
continue to get high wages. If wages are low to begin with, they 
will refuse to marry or will defer marriage to such a late age 
as to reduce the supply of labor and thus force wages up to a 
level which will enable them to maintain their standard. If the 
standard of living, however, is low, and the rate of multiplica- 
tion correspondingly high, wages tend to continue low. Even 
if wages were temporarily high, unless the standard of living 
should rise quickly, the rate of multiplication would so increase 
through early marriages and large families as to oversupply 
the labor market and force wages down again until they were 
just sufficient to maintain the low standard of living. 

Standard of living affects the price of labor as cost of pro- 
duction affects the price of a commodity. From the foregoing 
discussion it will be seen that the standard of living affects 
the wages of the general mass of unskilled labor precisely in 
the same way as the cost of producing a material commodity 
affects its price. Wages must be sufficient to overcome the dis- 
inclination to marry and produce families. This disinclination, 



WHAT DETERMINES THE RATE OF WAGES? 395 

however, is the joint product of a number of conflicting 
desires. In an elementary sense there is a strong incUnation 
to marry rather than a disinchnation, but the inchnation to 
marry is held in check by the desire of the individual for con- 
sumers' goods of his own. If he realizes that, with a family 
to support, he will have a little less money to spend on him- 
self, or that, if his family is too large, he will have less for 
each one of them and may not be able to educate them, such 
considerations will create a disinclination which may more than 
balance the inclination toward marriage. A real safeguard 
against low wages, therefore, is a high standard of living, which 
will check somewhat the tendency toward early marriages and 
large families. How far this should go is always a serious 
question. No one advocates so low a standard as would cause 
multiplication to take place as rapidly as is physiologically pos- 
sible. If that were the case, marriages would take place at the 
age of puberty, and women would be continually engaged in 
the functions of motherhood as long as childbearing was 
possible. Nobody would favor that. Everyone favors some 
kind of a standard of living and some postponement of mar- 
riage. It is only a question as to how high a standard and 
how much postponement is desirable. 

The law of population. This brings us to the great law of 
population, which has generally been associated with the name 
of Malthus. The law which Malthus worked out and which 
has never been successfully refuted, though many attempts 
have been made, may be briefly stated as follows : 

1. Every species of plant and animal has the physiological 
power to multiply faster than its means of subsistence will per- 
mit. Subsistence is the factor which actually limits numbers. 

2. The physiological power of human increase is also so 
great that if it should operate without moral or social restraints 
of any kind, it would carry population to such limits that vice 
or misery or both would begin to thin out the surplus popula- 
tion and thus operate as a check upon further increase. 



396 PRINCIPLES OF POLITICAL ECONOMY 

3. Owing to the law of diminishing returns, a larger number 
of people cannot, in any given state of civilization and the 
industrial arts, be so well provided for from the produce of a 
restricted area as a smaller number can. 

4. There is a strong natural instinct which inclines the 
members of our species to the multiplication of numbers, and 
unless this is counteracted by other motives, it will lead to an 
increase of population beyond the limits where comfortable 
subsistence is possible. 

5. This natural instinct is, however, opposed and held in 
check by several contrary motives, not the least important of 
which is the desire for the goods which one has been accus- 
tomed to consume, coupled with the perception on the part 
of each head, or would-be head, of a family that a larger num- 
ber of children means a smaller share of the necessaries, com- 
forts, and luxuries of life for each one, and this keeps the rate 
of increase far below that which, is physiologically possible. 

6. How rigidly the increase of numbers is held in check by 
this motive depends upon the ideas of the people as to what 
is essential, in the way of incomes, to their happiness, — in 
other words, upon their standard of living. It is the standard 
of living, therefore, which determines the rate of increase of 
population, given the amount of wealth and the possibilities of 
production. It plays the same part in determining the supply 
of labor which the cost of producing commodities plays in 
determining their supply. 

Refinement of the law of population. While this general 
law has never been successfully refuted, and is accepted by 
every economist of any standing, some refinements have been 
found necessary. For example, it makes a great deal of differ- 
ence in what stratum of society the increase in population 
takes place. There might be such a thing as a considerable 
increase in the total population which would result in a con- 
siderable increase in the rate of wages of unskilled labor. If 
we could double or treble or quadruple the number of people 



WHAT DETERMINES THE RATE OF WAGES? 397 

in what are known as the employing classes (that is, the pro- 
fessional men and, more particularly, the successful entrepre- 
neurs and independent business men), the competition among 
these business men would take, several forms. In order to 
equip and man their establishments they would have to bid 
against one another to get labor and also to sell their products. 
This would tend to bring up the price of labor and to bring 
down the price of products, — in other words, to leave a narrower 
margin of profits on which business men would have to live. 
For example, recent immigrants into the Phihppine Islands 
from America have not been unskilled laborers but skilled 
laborers, engineers, technicians, and business men. This has 
added somewhat to the population of the Philippines, but at the 
same time it has increased the demand for unskilled laborers 
and has therefore tended to improve their condition. Whether 
the increase in the higher economic grades comes through 
immigration or higher birth rate or better systems of education, 
they all produce much the same result. 

Effect of immigration. We began our discussion of the 
effect of the standard of living by assuming a community to 
which no immigrants came. However high the standard of 
living of the native laborers, or however strong the tendency of 
the educational and social system to raise the standard of living, 
if large numbers of immigrants with a low standard kept com- 
ing in, it would keep the standard down to a low level. At 
any rate the oversupply of unskilled labor would tend to keep 
wages down. Their coming tends to make business conditions 
easier for men who need to employ unskilled labor, but to 
make conditions very much harder for the unskilled laborers 
who are already there. If, however, the immigrants resemble 
those Americans who go to the Philippine Islands (that is, if 
they belong to the skilled, the professional, and the employing 
classes), they tend to make conditions easier for the unskilled 
laborers but harder for the skilled, the professional, and the 
employing classes who are already there. 



398 PRINCIPLES OF POLITICAL ECONOMY 

Noncompeting groups. This brings in the principle known 
by various names, such as the principle of noncompeting 
groups or the principle of joint demand. In the case of mate- 
rial commodities it sometimes happens that two or more articles 
have to be combined to supply the same demand, — such as 
sugar and cranberries, bread and butter, etc. If sugar is so 
scarce and so high that people cannot afford to buy it, there 
will be less demand for cranberries ; but if sugar is abundant 
and cheap, so that everybody can afford to buy it, there will be 
an increased demand for cranberries. In the field of produc- 
tion we get much better illustrations than in the field of con- 
sumption. It frequently happens that several different kinds 
of material have to be combined in the making of a single 
product, 1 — coal and iron ore, for example, in the making 
of steel. If coal were scarce and very expensive, and other 
kinds of fuel likewise, the best iron ore in the world would be 
of very little use and would have to sell, if it sold at all, at a very 
low price. With cheap and abundant coal the value of ore beds 
tends to rise. The same principle applies to different types of 
labor. Managerial skill, technical skill, and manual labor have 
to be combined in the production of many manufactures. If 
there were no manual labor to be had, managerial skill and 
technical skill would be of very little use ; with an abundant 
and cheap supply of manual labor these other forms of skill 
become enormously valuable to their possessors. Conversely, 
with no managerial and technical skill to go with it, manual 
labor would be worth very little in our industries ; with an 
abundance of managerial labor and technical skill large quanti- 
ties of manual labor can be utilized so that many industries can 
start. The first and most important refinement to be made in 
the doctrine of population, therefore, is to point out that the 
question of absolute number is not the only question involved, 
but the question of the occupational distribution of numbers. 
When the increase in numbers takes place among the unskilled 

1 Compare the law of variable proportions as presented in a previous chapter. 



WHAT DETERMINES THE RATE OF WAGES? 399 

laborers, it works to their disadvantage but to the advantage of 
those who belong in noncompeting groups, say the technically 
skilled and those possessing managing ability ; but when the 
increase in numbers takes place in the higher economic classes, 
it works to the advantage of the unskilled laborer. 

Summary. The discussion thus far may be summarized 
as follows : 

1 . The wages of any person will depend upon how much his 
labor is desired. The wages of any class will depend upon 
how important it is thought to be that there should be more 
laborers of that class, or that there should not be any less. 
High wages indicate a strong desire and low wages indicate a 
weak desire to have more of a certain kind of work done. 

2. Different kinds of labor usually have to be combined in 
fairly definite but somewhat variable proportions. If there 
happens to be more of a certain kind than will combine satisfac- 
torily with the existing supply of the other necessary kinds, 
the oversupplied kind will not be strongly desired. There 
will be no great need for more of it, and therefore no strong 
reason for paying high wages. The kind of labor, however, 
which is undersupplied will be much more needed. There will 
be a strong reason for desiring more of it, and the only way, 
in a free society, to get more of it is to offer high wages. 

3. Labor which requires a kind of skill that is difficult to 
acquire will usually be scarce, relatively to the need for it. 
Wages must be high enough to induce men to make the neces- 
sary effort in order to fit themselves for the work. 

4. Unskilled labor is usually abundant, being limited only 
by the disinclination to work and the standard of living or the 
cost of bringing up children. Where the cost is high, or the 
unwillingness great, wages must be high enough to induce men 
to marry and bring up children. When the cost is low and 
there is very little unwillingness to overcome, wages may be 
low because men will bring up children on very low wages 
and thus keep the supply of labor intact. 



CHAPTER XXXIII 

THE ORGANIZATION OF LABORERS 

Comparative advantages in bargaining. It has long been 
recognized that in the ordinary bargaining process between 
laborers and their employers, the laborers are at a disadvan- 
tage. The reasons why they are at a disadvantage have been 
variously stated. It is argued, for example, that the capitalist 
can wait longer than the laboring man, and thus wear the 
laboring man out and force him to give in and accept the 
capitalist's terms. The capitalist, it is said, having an accu- 
mulation of wealth, can live on that accumulation. There is 
doubtless something in this argument, though it is easy to 
exaggerate it. If the capitalist's accumulation is in the form 
of buildings and machinery, it is difficult to see how he can 
live on these things. He might borrow money on the basis 
of the security which they furnish, and with this borrowed 
money buy consumers' goods. 

It is not so much the fact that he is a capitalist as it is the 
fact that he has greater borrowing facility that gives him this 
advantage. If, instead of owning capital, he owned consumers' 
goods in considerable quantities, — if he owned, for example, 
his own house, if he had insurance policies or deposits in the 
savings bank, — he would have the same or even greater waiting 
power than he has when he owns capital of equal commercial 
value. It is therefore frequently argued that one remedy for 
this situation is for the laborer himself, as far as possible, to 
acquire his own home, life-insurance policies, and deposits in 
savings banks. This would help, at any rate, to give him the 
power to wait, and would thus help to even up the advan- 
tages in bargaining. But the objection to this is the simple 

400 



THE ORGANIZATION OF LABORERS 401 

observed fact that the laborers have less property of any kind 
than their employers ; otherwise they would not be laborers. 
This being the fact, it does not help much to point out what 
the laborer might do if the facts were otherwise. 

Another reason given for the disadvantage of the laborer 
in the bargaining process is that he is usually less skillful in 
the matter of bargaining than his employer. His expertness is 
more likely to consist of manual skill than of skill in bargain- 
ing. The entrepreneur is peculiarly a bargaining person. He 
literally bargains for everything. If he borrows capital, if he 
rents land, if he buys raw materials, secures transportation 
rates, and hires labor, and also organizes a selling department, 
— every part of his work has to do with bargaining. He be- 
comes, therefore, the bargainer par excellence. Those whose 
expertness lies in other directions are therefore at a disad- 
vantage when they come to deal with him. This argument 
is undoubtedly correct as far as it goes. 

Employers are few, but laborers are numerous. The third 
fact, however, which militates to the disadvantage of the 
laborer and the advantage of the employer is that laborers 
are numerous and employers are few. There is more competi- 
tion among laborers for jobs than among employers for men. 
Wherever this fact does not exist, there is no great advantage 
on the part of the employer. One conspicuous example would 
be that of domestic servants. The employer in this case 
doubtless has more power to wait than the maid. The em- 
ployer may, on the average, be somewhat more intelligent than 
the maid. Nevertheless there is no great advantage in bar- 
gaining, for the simple reason that there are approximately as 
many employers as there are employees. Observation seems 
to show that, in this part of the country at least, it is far more 
difficult for an employer to find a maid than for a maid to find 
an employer. When they meet to arrange terms, there is no 
visible advantage on the side of the employer or disadvantage 
on the side of the employee. In fact, it sometimes appears 



402 PRINCIPLES OF POLITICAL ECONOMY 

that the advantage and disadvantage are of the opposite kind. 
There are at least a reasonable number of cases where the 
employee is very independent and must be placated by an 
almost obsequious attitude on the part of the employer. A mul- 
titude of other illustrations might be given, which in the aggre- 
gate seem rather important, though as compared with the number 
of cases where the employer is at an advantage and the em- 
ployee is at a disadvantage they are probably insignificant. 

It appears, therefore, that the fundamental and permanent 
remedy for the laborer's disadvantage in bargaining would be 
such a reduction of the number of laborers and such an in- 
crease of the number of employers as would give the laborer 
at least an equal advantage in the bargaining process. This 
remedy, however, like all fundamental and permanent remedies, 
is slow and difficult to bring about. It is slow in the sense 
that it would take a generation or so to bring it about ; it is 
difficult, not for economic but for political and social reasons. 
Economically it is perfectly easy ; politically it is difficult 
simply because it would be difficult to get a majority of the 
voters to vote for such a policy. It may take several genera- 
tions before a majority vote could be secured for a constructive 
policy of this kind. Meanwhile the existing laborers would 
still be at a disadvantage and in need of relief. It would be 
cold comfort to them to point out that future generations of 
laborers may be exceedingly well off if the right policy is 
adopted. Therefore they are inclined to take matters into their 
own hands and adopt a more speedy remedy, even though it 
be less fundamental and less permanent. 

Collective bargaining. This remedy is that which is known 
as collective bargaining as against individual bargaining. In a 
trade where laborers are oversupplied, each individual laborer 
is in a weak position, because he can easily be spared. He is 
almost superfluous ; he is certainly not indispensable. If he 
stops working or leaves the community, he will scarcely be 
missed. Industry will go on approximately as well without him 



THE ORGANIZATION OF LABORERS 403 

as with him. Because there is a superfluity of labor his place 
can easily be filled. Under such conditions his bargaining 
power is very weak; he is practically compelled to take what- 
ever terms are offered to him. His kind of labor as a whole, 
however, may be absolutely indispensable. While he as an 
individual could be spared without much inconvenience, all 
the members of his trade are absolutely indispensable when 
considered as a whole. If they were all to stop work, business 
would have to stop ; if they were all to emigrate, the whole 
business in which they were engaged would be permanently 
destroyed. 

The group may be indispensable, while the individual could 
easily be spared. The fundamental principle involved in the 
trade-union policy of the present is the substitution of the 
indispensable group as a bargaining unit for the dispensable 
individual. Since the group as a whole is indispensable to 
industry, if they can bargain as a whole the laborers are in a 
strong position. As a group they cannot possibly be spared. 
The difficulty, however, has always .been to hold the group 
together and get them to bargain absolutely as an indispen- 
sable group and to refrain from making individual bargains 
independently of group action. 

The trade union. This underlying principle has given rise 
to one of the largest social movements of modern times ; 
namely, the organization of laborers. Several types of organi- 
zation, however, have entered the field, and there is still some 
rivalry among them. In the first place, there is the trade 
union pure and simple ; this is an organization of the men 
who ply the same trade ; that is, the men whose work is of the 
same kind. The Brotherhood of Locomotive Engineers is an 
example of this kind of organization. 

The industrial union. In the second place, there is the in- 
dustrial union, which includes all the laborers plying various 
trades who are engaged in the same general line of industry. 
The United Mine Workers of America is one example of this 



404 PRINCIPLES OF POLITICAL ECONOMY 

type of organization ; the Brotherhood of Railroad Trainmen 
of America, which attempts to take in all the railroad workers, 
is another. 

The labor union. A third type of organization is what may 
be called the labor union, which attempts to organize all 
laborers, of whatever trade or occupation and in whatever in- 
dustry they may be engaged. The Knights of Labor form an 
organization of this type and lately the Industrial Workers 
of the World have attempted a similar type of organization. 

The federation of trade unions. The trade union seems in 
recent years to have been somewhat stronger than either the 
industrial union or the labor union, but it has felt the need 
of some larger and more nearly universal type of organization. 
This has been secured by the federation of trade unions into a 
national organization known as the American Federation of 
Labor. This type of organization recognizes that each trade 
has certain special and peculiar interests of its own and there- 
fore has a special reason for organizing as a trade. This is a 
principle which seems to be ignored by the labor union espe- 
cially. By organizing the special and peculiar interests of each 
trade the federation becomes stronger at this most vital point. 
By federating the different trades for the furthering of the 
interests which are common to all it becomes stronger at 
another important point ; namely, the need of concerted action 
on a nation-wide scale. 

The attempt to ignore the special interests of each trade 
and to unite all workers, of whatever trade or industry, into one 
universal, undifferentiated organization, has had certain ideal- 
istic features which make a strong appeal to men of idealistic 
temperament. There is the attempt to ignore any possible 
rivalry of interests among different classes of laboring men. 
While this sounds attractive, it hardly accords with the observed 
facts. It is perhaps a little more humanitarian in its philos- 
ophy but a little less effective in its methods of work. It 
might be compared to an attempt to create a unified nation by 



THE ORGANIZATION OF LABORERS 405 

ignoring all local interests and internal conflicts, whereas the 
federation idea might be compared to a system of government 
which would recognize local and state interests, and allow a 
certain amount of self-government to the local units, but which 
would unite them all under a national government for the 
carrying out of national aims. 

Necessity of controlling the supply of labor in its own 
market. Like all attempts in all fields to bargain to better 
advantage for the sale of either a commodity or a service, an 
organization of laborers must get control of the supply of the 
service which it is trying to sell. This leads to the policy of 
the closed shop. That is the policy under which none but 
members of the organization are to be employed in a given 
shop or series of shops. If any considerable number of out- 
siders are permitted to work in these shops, they will of course 
bargain independently and be in a weak position. That very 
fact also tends to weaken the power of the organization in 
the bargaining process. Unless the organization can control 
the supply of labor which is permitted to work in a given 
trade, — can withdraw them as a body or put them back as a 
body, — it will find itself unable to secure advantageous terms. 
If, for example, there were so many nonunion laborers avail- 
able as to make the employer more or less indifferent as to 
whether the members of the union worked as a body or with- 
drew as a body, he would not be likely to pay much attention 
to the demands of the union. If he knew that, even though 
the union as a body withdrew from his shop, he could easily 
fill places with nonunion men, the bargaining power of the 
union would at once be destroyed. 

The closed shop. An absolutely closed shop is very difficult 
to maintain when there is a surplus of laborers available for a 
given occupation. So long, for example, as indefinite numbers 
of foreign-born laborers can be had for the recruiting of the 
ranks of any trade, nothing but the most drastic measures on 
the part of the organization of laborers can preserve its control. 



406 PRINCIPLES OF POLITICAL ECONOMY 

It is sometimes necessary, from their point of view, to use a 
good deal of persuasion, and this persuasion is sometimes of a 
rather severe nature and often virtually amounts to compulsion. 

The strike. The strike has become one of the drastic methods 
through which an organization of laborers may enforce its con- 
trol over the labor supply. Theoretically the strike is merely 
the suspension of work by the laborers of a given trade or 
group of trades. If there were no waiting list and no avail- 
able mass of laborers from which to fill the shops which they 
have vacated, a mere quiet suspension of work would be all 
that would be involved in a strike. This, however, is seldom 
the situation. There is generally such an oversupply of labor, 
especially of the unskilled kinds, as to force the strikers to do 
something else besides the mere suspension of work. They 
must manage somehow to keep others from taking their places. 
This may take the form of peaceful picketing and persuasion ; 
it may take the form of threats ; and, in extreme cases, it may 
even take the form of violence and terrorism. It is to be re- 
membered, however, that threats, violence, and terrorism are 
only necessary, even from the laborer's point of view, when 
there is an oversupply of labor available for the jobs of the 
strikers. The ultimate cure for this situation is that which was 
suggested earlier in this chapter, — such a thinning out of the 
number of laborers, especially in the unskilled occupations, as 
to reduce the number of men to an approximate equality with 
the number of jobs. 

In justification of the strike, even when accompanied by 
threats and violence, it is sometimes euphemistically stated that 
the laboring man has a right to his job and no other laboring 
man has a right to take it away from him. Or, as it is some- 
times put, the labor unionist's eleventh commandment is, 
Thou shalt not steal thy neighbor's job. This, however, is not 
quite complete ; it really should read. Thou shalt not steal thy 
neighbor's job unless he is a nonunion man, and in that case 
thou shalt go after it with a club. 



THE ORGANIZATION OF LABORERS 407 

Numbers make for weakness in bargaining but for strength 
in fighting and voting. One large fact which comphcates 
the whole problem of the organization of laborers and their 
methods is that those who, because of their numbers, are weak 
in the bargaining process become, by virtue of those same 
numbers, strong in the making of public opinion and in the 
election of candidates for office. Roughly speaking, one may 
say that the more people there are of a certain individual type, 
the weaker they are in the process of individual bargaining 
but the stronger they are in making public opinion and con- 
trolling elections. It is pretty certain, therefore, that they will 
use their strength in controlling public opinion and politics to 
compensate for their weakness in the bargaining process. 
Whatever our views on the purely ethical aspects of such ques- 
tions as the closed shop, the strike, picketing, threats, and vio- 
lence, we must realize once and for all that in a republic, where 
majorities control, there is absolutely nothing to be done about 
it. Those who realize that they are weak in the process of 
peaceful individual bargaining but strong in other ways can be 
depended upon to use that strength to their own advantage. 
On the other hand, those who, because their numbers are few, 
are very strong in the process of peaceful and individual bar- 
gaining, must realize that politically they are very weak, since 
they have very few votes. It would be as futile, therefore, to 
expect that, when there is an oversupply of labor, the laboring 
men will go on indefinitely, bargaining individually for jobs 
and accepting the disadvantages under which they labor and 
refraining from using the strength of numbers in their own 
interests, as to expect that the tides should cease to rise and 
fall or the winds to blow. 

When a numerous class realizes that its numbers count 
against it in bargaining but for it in fighting and voting, it is 
pretty certain, sooner or later, to try to win back, by fighting or 
by voting, what it has lost in bargaining. Therefore there 
are two very good reasons why we should try to maintain a 



4o8 PRINCIPLES OF POLITICAL ECONOMY 

balanced population. By a well-balanced population is meant a 
population in which, among other things, each occupational 
group is no more numerous than is necessary to combine with 
other occupational groups. If, for example, there are no more 
spinners than are needed to supply yarn for the weavers, no 
more of both than are required to combine satisfactorily with 
other groups, no more unskilled laborers than are necessary 
to work in combination with the skilled laborers, no more of 
both than are necessary to work in combination with salesmen, 
accountants, managers, etc., the population is well balanced so 
far as these groups are concerned. When this is the case, no 
group will be at a disadvantage in the bargaining process. That 
is one reason. The other is that no group would have the 
motive or the power to win back, by fighting or by voting, 
what it was losing by bargaining. Such a balancing of our 
population would eliminate the more acute phases of our 
labor problem. 



CHAPTER XXXIV 

THE RENT OF LAND 

Rent the price paid for the use of land. The rent of land 
originally meant the price paid for its use during a given 
period of time. Its meaning is now extended to cover the 
income which the owner derives from it, whether he uses it 
himself or lets it out to someone else. The selling price of 
land is the price paid as a lump sum for its permanent pos- 
session, which includes its use through all future time. Its 
value is the present estimate of all its future utilities, whether 
they are sold or kept by the present owner and his heirs. 
There is thus a very close connection between the value, or 
price, of land, on the one hand, and its rent, on the other. The 
rent is the value, or the price, of the flow of utilities which it 
yields during a given period of time, such as a month or a 
year. Both the value and the rent of land come under the 
general law of value ; both are determined by utility and 
scarcity, as is the case with all forms of value. 

Why rent is paid. The utility of land is of various kinds 
and degrees. In some cases land yields its utilities directly, 
and thus is a consumers' good, or at least resembles con- 
sumers' goods in this respect. Parks, pleasure grounds, and 
residence sites yield their utilities in this way instead of yield- 
ing tangible products. In other cases land yields its utilities 
indirectly ; that is, it produces or helps to produce tangible 
products which are themselves useful. In these cases the 
utility of land, like that of all producers' goods, is a derived 
utility. Its utility is derived from that of its products. 

There are great differences in the utility or desirability of 
different pieces of land, whether they are used for one purpose 

409 



4IO PRINCIPLES OF POLITICAL ECONOMY 

or for another. In the chapter on land it was pointed out 
that these differences are mainly in location and fertility. The 
other qualities which make land usable, such as extension and 
solidity, all land possesses in equal degree, so that these quali- 
ties do not make one piece more desirable than another ; but 
in the qualities of location and fertility there are great differ- 
ences, and these differences powerfully affect its desirability 
and its value. 

Differences in the desirability of land. The problem of rent 
may be approached in several ways. In the first place, we may 
concentrate our attention on the differences in rent or the dif- 
ferences in the desirability of different pieces of land. There 
is always land somewhere the use of which can be had free of 
charge. Nevertheless, men will be found paying high rents 
for other land which is more desirable than that which can be 
had free of charge. The fact that it is more desirable than the 
free land is what makes it command a rent. In the case of 
land which is useful for production only, its desirability is of 
course determined by its productivity. He who secures the use 
of a superior piece of land can either produce more at the same 
cost than would be possible on the kind of land which is free 
or he can produce the same amount at lower cost. This differ- 
ence in productivity gives its owner a rent when he cultivates 
or uses it himself, and enables a tenant to pay rent, in case 
the land is worked by a tenant. 

Location as an element in desirability. That the location of 
a piece of land will affect its productivity will be clear to any- 
one who will consider that the cost of transporting goods to 
market is a part of the cost of production. If one farm is so 
badly located with respect to railroads and markets that it costs 
ten cents a bushel to haul the wheat to the nearest railroad, 
while another farm is so well located that the hauling costs 
only two cents a bushel, it is evident that if the two farms 
are equally fertile, the former will be worth considerably less 
than the latter. The difference of eight cents a bushel in the 



THE RENT OF LAND 41 1 

cost of haulage would make a difference of ^2.40 per acre 
if the average crop on the two farms was thirty bushels per 
acre. A tenant could afford to pay that much more for the 
well-situated than for the badly situated farm. 

If land were so abundant that the badly situated farm in 
the above illustration, and other land equally desirable, could 
be had rent free, and if it were the most desirable land which 
could be had free, then land of this type might be called 
marginal land, or land on the margin of cultivation. By 
marginal land is meant land which, under the conditions of 
the market, men would be induced to cultivate if it cost them 
nothing, but which they would abandon and leave unused if 
they were required to pay even the lowest conceivable rent for 
its use. Under these conditions the rent of the well-located 
farm of the above illustration would be ^2.40 per acre, assum- 
ing that wheat is the only crop. 

The margin of cultivation. Aside from the productivity of 
the land, two other factors help to determine the margin of 
cultivation. These are the demand for products and the de- 
mand for labor, or the opportunities for the employment of 
labor. An increase in the demand for products will generally 
bring land into cultivation which would otherwise have re- 
mained idle, whereas a decrease in the demand for products 
will cause some poor land to be abandoned which would other- 
wise have remained in use. The margin of cultivation may 
change, however, for other reasons. When the prairies of the 
West were brought into cultivation, the margin was extended 
in that direction ; but this threw so many products on the 
market that some of the less productive lands of New England 
could no longer be advantageously cultivated. Much of this 
land was abandoned, and the margin of cultivation was con- 
tracted in this section. The extension of the margin on the 
western frontier and the contraction on the rocky hillsides of 
New England tended to counteract one another. There was, 
however, at the same time a growing demand for products. 



412 PRINCIPLES OF POLITICAL ECONOMY 

so that the expansion in one direction more than made up for 
the contraction in the other. In other words, the total pro- 
duction actually increased, despite the diminution on some of 
the New England farms. 

Factors which extend the margin of cultivation. An in- 
crease in the supply of labor which is seeking employment, 
unless counteracted by a corresponding increase in the demand 
for it elsewhere, will generally extend the margin of cultivation 
and cause land to be cultivated which would otherwise have 
remained idle. This problem may be approached from two 
points of view. In the first place, idle land may be regarded 
as an opportunity for idle men. When the supply of labor in- 
creases faster than the demand for it, the number of idle men 
increases. Some of these idle men are then crowded out onto 
the idle land. Even if they are not actually thrown out of work, 
the results are much the same. There is always a current of 
migration from the farms to the towns. When the labor mar- 
ket in the towns is overcrowded, country boys find fewer 
inducements to leave the country. Therefore they must per- 
force remain on the farms and cultivate the land. When 
larger inducements are offered in the towns, more of them 
leave the farms and less land can then be cultivated. 

Another way of approaching this problem is by considering 
the wages of farm labor. When farm labor can be had at a 
low cost, some land can be cultivated profitably which could 
not be if the same kind of labor cost more. Wherever farm 
labor is cheap, we actually find that there is little land going 
to waste except the very poorest. Where farm labor is expen- 
sive and hard to find, we actually find fairly good land going 
to waste. Only the best land can be profitably cultivated by 
expensive labor. It must be remembered, however, that labor 
is not necessarily expensive merely because wages are high. 
Very efficient labor may be cheap even though it is paid high 
wages, and very inefficient labor may be expensive even though 
it works for low wages. With this explanation it ought to be 



THE RENT OF LAND 413 

clear that, with a given demand for farm products, poorer land 
can be cultivated if labor is abundant and cheap than would be 
profitable if it were scarce and dear. 

Different grades of land. A partial illustration of the doc- 
trine of rent can be found in a study of the following figure 
and the explanation which follows it. It is only a partial ex- 
planation, however, because it omits the law of diminishing 
returns. This lack will be corrected in the subsequent illustra- 
tion and explanation. 



Grade A, 


yielding 1000 units of product to 


100 units of labor. 


Grade B, 


yielding 900 units of product to 


100 units of labor. 


Grade C, 


yielding 800 units of product to 


100 units of labor. 


Grade D, 


y-ielding 700 units of product to 


100 units of labor. 


Grade E, 


yielding 600 units of product to 


100 units of labor. 



Let us assume a -miniature community possessing five grades 
of land, as indicated in the above figure. On the best grade of 
land, which is of limited extent, 100 units of labor will pro- 
duce 1000 units of product ; on the next grade, 900 units of 
product ; on the next, 800 units of product ; etc. If the de- 
mand of the community were for only 1000 units of product 
and there were only 100 units of labor, only the best grade 
of land could be used. Until it was all in use there would 
be no rent. But if the population were to increase so that 
there was an increase in the demand for products and also in 
the supply of labor, grade A would not continue to be suffi- 
cient. If, for example, the demand were to increase so that 
1500 units of product were needed, some of it would have to 
be produced on the second grade of land, which would thus be 
the marginal land. On this marginal grade, however, each unit 



414 ^ PRINCIPLES OF POLITICAL ECONOMY 

of labor would produce only nine units of product, whereas on 
the best grade it would produce ten units. Clearly each pro- 
ducer would rather work on Grade A than on Grade B. Be- 
cause of this preference he can be persuaded to pay something 
for the privilege of working on Grade A. Approximately one 
unit of product for each unit of labor would be paid for the 
privilege of farming on Grade A. An owner of a portion of 
Grade A who works it himself is better off than an owner of a 
portion of Grade B. This excess of his income over that of an 
equally good worker on Grade B is rent just as truly as though 
he received it in cash from a tenant. 

If the demand for products continues to increase until it 
requires 2500 units of product, some of Grade C will have to 
be brought into use. This would now be the marginal grade. 
On Grade C, however, each unit of labor produces only eight 
units of product. Rather than work on this land, producers 
would be willing to pay something for the privilege of working on 
either Grade A or Grade B. Each unit of labor would be will- 
ing to pay approximately two units of product for the privilege 
of working a portion of Grade A, or one unit for the privilege 
of working a portion of Grade B, rather th^n be forced to cul- 
tivate land of Grade C. In either case it would have as much 
left as it would have if it got the whole of the product on 
Grade C without any deduction for rent. If we go on assum- 
ing an increase in the population, and a consequent increase in 
the demands for products and in the number of units of labor 
available for the cultivation of land, we shall find each of the 
Grades D and E in succession brought into cultivation, and 
the rent going up correspondingly on every grade except the 
marginal one. 

Differences in productivity. The differences in the produc- 
tivity of land may be represented or illustrated by the following 
diagram if it is understood that lands of different grades are 
ranged along the line OX, with the most productive piece of land 
at the point O and absolutely barren land at the point X, with 



THE RENT OF LAND 



415 



every variation between. If we measure the productivity of the 
different parcels on the Hne O V, the curve VBX may be called 
the productivity curve. When a total product represented by 
the surface OA YBC is to be produced, only the land between 
O and C will be required. That at the point C will be marginal 
land, and all between C and X will be unused. The line BC 
represents the productivity of the marginal land, and the sur- 
face YBA will represent the rent on all the other land in use. 
Relation of diminishing returns to rent. This explanation, 
however, is incomplete, as any explanation of rent is incom- 
plete unless it takes into account the law of diminishing 
returns. Even on the 
best land — in fact, 
on any grade of land 
— different applica- 
tions of labor and 
capital produce dif- 
ferent results. After 
a certain quantity of 
labor and capital have 
been applied to the cultivation of a given piece of land, further 
increase in the labor and capital do not yield proportionately 
increased returns. ^ If this were not true, it would never be 
necessary to cultivate any but the best grade of land. If, for 
example, 200 units of labor on Grade A of the land described 
in the figure on page 4 1 3 would produce 2000 units of product, 
that would be better than to spread it over both Grades A and 
B, where it would produce only 1900 units of product. Again, 
if 300 units of labor would produce 3000 units of product, 
and 400 units of labor 4000 units of product, and so on in- 
definitely, we should have what are called constant as opposed 
to diminishing returns. If constant returns could be secured 
indefinitely, as stated above, it would never be advisable to 
cultivate any land but Grade A of our illustration. 

1 As shown in Chapter XXX, on The Law of Variable Proportions. 




41 6 PRINCIPLES OF POLITICAL ECONOMY 

But the simple and well-known fact is that increasing ap- 
plications of labor and capital to the same land do not yield 
constant returns, much less increasing returns. Instead of 200 
units of labor yielding 2000 units of product on Grade A, and 
300 units of labor yielding 3000 units of product, it is more 
likely that 200 units of labor would yield 1 800 units of product, 
and 300 units of labor 2400 units of product, or some such 
quantity. If that were the case, it would be better to take 
Grades B and C into cultivation rather than to put all the 
increasing labor supply onto Grade A. Unless something like 
this rate of diminution in the returns should result, the inferior 
grades would never come into use at all. 

The value of land to the community. Thus far we have 
been considering the differences in the productivity of different 
grades of land as the reason why rent is paid and the factor 
which determines how much rent is paid for land of a given 
grade. Another way of viewing it, which leads to the same 
result, is to consider how much better off the community is 
when a given piece of land is in cultivation than when it 
is not. If there is an abundance of uncultivated land in every 
way as good, location and everything considered, as the piece 
of land in question, the only result of withdrawing it from 
cultivation would be to bring into cultivation an equal quantity 
of other land. In such a case the community loses nothing 
when it is withdrawn from cultivation, nor would it gain any- 
thing if it were brought back into cultivation. There being 
more land of this grade than can be cultivated, some labor 
must be withdrawn from other land when this piece of land 
is cultivated. 

If, however, there is a scarcity of land of the grade of the 
piece of land in question, there is certain to be a decrease in 
the total production of the community if it is withdrawn from 
cultivation, and an increase when it is brought back into culti- 
vation. If it is withdrawn from cultivation, the labor and tools 
which were used in cultivating it must now find employment 



THE RENT OF LAND 417 

on other land. If it goes onto poorer land, such as has been 
hitherto uncultivated, its product will be less. The production 
of the community is decreased by the amount of the difference 
between the product on the piece of land in question and the 
product on the poorer land. If the labor and tools go onto 
land which is already under cultivation, it merely adds to the 
number of laborers and tools already on that land, and carries 
the margin of cultivation a little farther. It will add something 
to the product from that land, but not an amount equal to the 
total product formerly produced on the land which is now 
thrown out of cultivation. The difference between the total 
amount produced on the land now thrown out of cultivation 
and the amount which the labor and tools could add to the 
product from other land measures the loss to the community 
when the piece of land in question is thrown out of cultivation, 
and the corresponding gain when it is brought back into 
cultivation. This difference, however, corresponds to the rent 
of the land. 

The law of rent. The rent of a piece of land, therefore, 
is determined by the difference between what can normally be 
produced upon it and what an equal amount of labor and cap- 
ital can produce in less advantageous positions still open to 
them. These less advantageous positions may be found either 
by going onto the inferior lands still uncultivated or by crowding 
onto land already cultivated. 



CHAPTER XXXV 

THE SOURCE OF INTEREST 

What is interest? One of the most difficult and elusive of 
all problems in economics is that of the interest of capital. 
Interest may be defined as the income which goes to the 
owner of capital, whether he uses it in his own business or 
lends it to somebody else. This income may take any one of 
several forms. The most common and clearly understood 
form is where a definite sum of value, represented usually by 
money, is loaned by the owner to someone else. The bor- 
rower, in return for the loan, eventually pays back not only 
the principal but a stated sum or percentage of the principal 
year by year. The transfer of purchasing power from the 
lender to the borrower, however, does not necessarily take the 
form of money. It may be rather a claim upon some credit 
institution for money, as when the lender gives the borrower 
a check on the bank. The borrower then deposits this check 
in his own bank and proceeds to draw his own checks against 
this deposit. In a case of this kind no money is transferred, 
and the borrower may not even see or handle any money. 
Nevertheless there has been transferred to the borrower pur- 
chasing power in the form of a claim upon the bank for money. 
But the purpose of the borrower was not ultimately to secure 
money. Money is to him only a means of purchasing some- 
thing which he really wants, and if he can make the purchases 
without actually handling the money, — by handling credit in- 
struments instead, or claims upon a bank for money, — his pur- 
pose is answered just as well. Aristotle pointed out long ago 
that money serves merely as a claim upon society for a share 
of the general fund of wealth in its possession. A credit in- 
strument is only a more highly evolved claim of the same kind. 

418 



THE SOURCE OF INTEREST 419 

In the second place, the capitahst may transfer to the 
borrower, not purchasing power, but the material goods which 
the lender desires and which he would buy if he were given 
the purchasing power ; that is, the capitalist may transfer 
to the borrower specific pieces of capital, such as buildings 
and machinery, allowing the borrower the use of these pieces 
of capital for a definite period of time. At the end of the 
time they are of course to be returned to the lender. Mean- 
while a definite sum is to be paid at stated periods for their 
use. This sum is commonly called rent rather than interest, 
and there are some reasons for this custom. In the first place, 
the sum which is paid in the form of money for the use of a 
group of material objects cannot be reduced to a percentage 
basis until those objects are evaluated and their quantities 
stated in terms of value. Suppose that the agreement was, to 
pay five thousand dollars a year for a certain group of build- 
ings and a mass of tools and equipment. The five thousand 
dollars a year is not a percentage of the group of buildings. 
If, however, the buildings are appraised and their value stated 
as one hundred thousand dollars, then it is possible to reduce 
the annual payment for their use to a percentage basis. It 
might then be said that the borrower was paying 5 per cent 
on the sum borrowed. Unless the transaction takes this form 
it is more convenient to say that he is paying five thousand 
dollars rent than to say that he is paying 5 per cent interest. 
The chief reason for calling it interest is that economists have 
formed the habit of speaking of rent as that which is paid for 
the use of land, and of interest as that which is paid for the 
use of capital. Since the buildings and the equipment are capi- 
tal rather than land, that which is paid for their use would have 
to be called interest, unless we change the definition of interest. 

Distinction between rent and interest. There seem to be 
some very important reasons for distinguishing between rent 
and interest in this way. Land is a natural resource ; it is 
not the product of human foresight or of human industry, 



420 PRINCIPLES OF POLITICAL ECONOMY 

Buildings, tools, equipment, etc. are the products of foresight, 
enterprise, and industry. That which the landowner receives 
as rent for his land he receives because he has come into the 
possession of a natural agent which neither he nor anyone 
else produced ; that which the owner receives for the use of 
buildings, tools, and equipment he receives for something 
which he either produced or paid someone else for producing. 
There seems, therefore, to be a wider difference between that 
which is paid for the use of buildings, tools, and equipment and 
that which is paid for the use of land than there is between 
that which is paid for borrowed money and that which is paid 
for buildings, tools, and equipment. In this discussion, there- 
fore, we shall adhere to the distinction between rent and interest 
which nearly all standard books on economics have followed. 

In the third place, the income of the capitalist may be 
secured from the use of capital in his own business. This, 
however, is sometimes difficult to distinguish from profits. 
Economists generally distinguish between interest and profits 
in this way : the business man who has his own capital in- 
vested in his business is allowed the current rate of interest 
on that investment ; if he labors or puts in his time super- 
vising the business, he is also allowed a salary or wages of 
superintendence ; if he has anything left over after allowing 
himself interest and wages, this surplus is called profit or 
profits. If he has not been particularly successful, the profits 
may be negative ; in other words, he may incur a loss. That 
means that his total income may not be as great as it would 
have been if he had gone out of business, loaned his capital 
at interest, and hired out at a salary as a superintendent. 

Interest, therefore, as it is generally defined, includes that 
which the owner receives for the use of a fund of purchasing 
power which he transfers to a borrower ; that which he receives 
for the use of a mass of material goods, buildings, tools, equip- 
ments, etc. which he permits the borrower to use for a stated 
period ; and that which he receives in return for the capital 



THE SOURCE OF INTEREST 42 1 

which he owns and which he uses, or has invested, in his 
own business. Care must be taken, in considering these vari- 
ous forms of interest, not to include too much. That which 
the lender of a fund of purchasing power receives in excess 
of the amount necessary to preserve the fund intact is inter- 
est, and that alone. If any insurance is involved, this must 
be deducted from the total amount received. Some very haz- 
ardous investments appear to pay very high rates of interest. 
This may be called gross interest, only a part of it being net 
interest, the remainder being payments for risk and akin to 
profits rather than interest. Again, when equipment itself is 
loaned, rather than a fund of purchasing power, allowance 
must be made for deterioration. Unless the capitalist main- 
tains the quantity of his capital intact, and receives a surplus in 
addition to this, he has not received interest. It might easily 
happen that a part of the five thousand dollars received for 
the buildings, tools, and equipment in the above illustration 
was necessary to keep the buildings in repair and to recoup 
the owner for the necessary deterioration. In short, interest 
is the amount which the owner of capital receives over and 
above the sum necessary to maintain the original quantity of 
his capital. 

Why is interest paid ? The problem of interest thus defined 
divides itself into two parts : first, why is interest paid .? second, 
what determines the rate of interest .? One answer to the first 
question is that capital is productive. This could apply only 
to what we have defined as productive as opposed to acquisitive 
capital. That any kind of capital is productive has sometimes 
been called in question. Something depends upon the mean- 
ing of the word productive. No one has challenged the propo- 
sition that tools are useful. Those who assert that capital is 
productive mean absolutely nothing more than this. Those 
who deny the productivity of capital invariably have some other 
definition of the word productive in mind, and there is not 
much to be gained by quibbling over the use of words. 



422 PRINCIPLES OF POLITICAL ECONOMY 

If tools are useful, it is pertinent to ask for what are they 
useful? They are useful for production, not for consumption. 
With an adequate equipment of tools one can produce more 
than one can produce with an inadequate equipment. The 
formula, '' More and better tools, more production ; fewer tools 
or poorer tools, less production," supplies the farmer and the 
business man with as good a theory of economic causation as 
any logician has ever been able to invent. If I am a farmer 
and perceive that with an additional horse I can grow a larger 
crop than I could if I did not have that additional horse, I am 
not likely to puzzle my head very much over abstruse questions 
of economic causation. The fact that a larger crop will result 
from my using another horse is a sufficient reason why I should 
try to come into possession of that horse. 

Marginal productivity of capital. It is true, as has been 
pointed out and argued ad nauseam, that if I did not have 
any plows or tools to use with the horse, he would be of no 
use ; or if I did not have any labor to direct him, he would 
not produce anything. This line of argument, instead of prov- 
ing that the horse is not productive, merely proves that other 
forms of capital, as well as labor, are also productive. In any 
given situation, with any given type of equipment, find out 
how much you can produce without any particular unit, say 
the horse in question, and then how much you can produce 
with it, and you have a measure of the productivity of that 
unit in that situation. At any rate, it is a fair test as to how 
much that unit would be worth when added to the rest of the 
equipment. If there is another farmer whose equipment calls 
for an extra horse, and if an extra horse will add more to the 
product on his farm than on mine, the other farmer will bid 
against me for the horse, and under the circumstances can 
afford to pay more for it than I can. If he has n't the money 
with which to purchase it, he can afford to pay a little more 
for the use of the money than I can afford to pay. Apply 
this test to each and every kind of capital required, not only 



THE SOURCE OF INTEREST 423 

on farms but in shops and factories, railroads, stores, etc., and 
we get an idea of the test of the usefulness, or -productivity, 
of capital. It might very well be, however, that on another 
farm, where there was a surplus of horses, the farmer in charge 
would find that one more horse would add little or nothing to 
his crop. Having a surplus of horses, what he would need 
more than he would need an extra horse would be some extra 
plows and harrows, or plows and harrows of a larger size, to 
balance his equipment. If he understands the situation, he 
will see that it is to his advantage to sell some of his horses 
or else to buy other equipment. This balancing of the equip- 
ment of industries goes on all through society and is one of 
the fundamental problems of business management.^ 

Here we must repeat a caution which was given in the 
discussion of value. We are not to discuss the productive- 
ness of labor in general or of capital in general, any more 
than we are to discuss, under the problem of value, the utility 
of bread in general, meat in general, or water in general. 
We are always concerned with definite units which may be 
added to or subtracted from the existing supply. Therefore 
we are not concerned with the productiveness of horses in 
general, cows in general, or even capital in general, but with 
the need for definite units of capital, such as one horse more 
or less, one cow more or less on a given farm, one boiler 
more or less in a real factory, and so on through the whole 
range of industry. Wherever any producer finds that he could 
use more capital of any form advantageously, he has a per- 
fectly good reason for trying to get an additional unit of that 
particular kind of capital. Whether we call it the productivity 
of the unit of capital, or merely its usefulness, does not matter. 

The opposite method of reasoning is involved in the state- 
ment that if there were no labor, capital could not produce any- 
thing. This is dealing with labor in general and capital in 
general. It is likewise true, of course, that if there were not 

1 Compare Chapters XV and XXX. 



424 PRINCIPLES OF POLITICAL ECONOMY 

any capital, labor would not be able to produce very much dur- 
ing the next month or the next year, — not, in fact, until it had 
equipped itself with a new supply of tools. It might very well 
happen that in any definite community, like the overcrowded 
section of a great city, there would be more unskilled labor than 
could possibly be used at that particular place. The formula 
*' More of this particular kind of labor, more product " would 
not apply. When we speak, therefore, of the productivity of 
capital, we do not mean that capital is productive under all pos- 
sible circumstances, regardless of the surroundings. Neither is 
labor productive in that sense ; it has to be located where there 
is at least land available, and in order that it may be very pro- 
ductive it must have an adequate supply of tools. In short, 
nothing is productive when it stands alone, unrelated to many 
other things in the surrounding universe. Labor, of course, is a 
more fundamental and primary agent of production than capital, 
since capital is itself the result of labor, thrift, and enterprise. 
But we are not, in a practical work on economics, dealing with 
an absolutely primitive economic situation ; we are dealing rather 
with the conditions which we find all around us, and with the 
specific needs of specific industries and specific communities. 
What does capital include? As capital was defined in the 
chapter devoted to that -subject, it includes something more 
than producers' goods. It includes consumers' goods which 
are loaned, rented, or hired in order to secure income for their 
owner. In these cases the income of the capitalist is not due 
to the productivity of the consumers' goods thus loaned ; it is 
due rather to their usefulness in consumption. He who builds 
a dwelling house, or hires someone else to build it, and then 
rents it to an occupant, is virtually selling the flow of utilities 
which the house furnishes to the occupant during a definite 
period of time. These utilities are in the form of comfort, 
convenience, luxury, and even style in some cases ; but the 
problem of interest is much the same, in the last analysis, 
whether the capital be productive or acquisitive. 



THE SOURCE OF INTEREST 425 

Capital itself, not its value, is productive. Those who 
deny the productivity of capital generally have a special defi- 
nition of capital. Instead of thinking of productive agents they 
are usually thinking of a sum of value. They do not neces- 
sarily mean money, but a fund of value which is embodied in 
capital goods. Of course the value of capital goods does not 
produce anything. The value of the horse does not cause him 
to do good farm work ; it is the fact that he does good farm 
work which causes him to have value. If, instead of think- 
ing of the farmer's capital as horses, cows, and other equip- 
ment, we think merely of the value which is embodied in 
them, we may easily reach the conclusion that capital is not 
productive ; but if, instead of thinking of the value which is 
embodied in them, we think of the objects themselves, we can 
hardly avoid the conclusion that they are the agents by which 
production is increased. 

In order to bring the law of interest under the general law 
of value, let us recall the fact that things have value only when 
they are wanted by someone. This is as true of capital as of 
anything else. If we confine our attention to that portion of 
capital which consists of producers' goods, without considering 
the subject of consumers' goods which are used by their owners 
for the getting of an income, it is safe to say that the use of 
capital is desired only for the sake of what it will add to the 
productive power of the user. He does not want it for his own 
sake. If it added nothing to his productive power, he would 
not want it and would not be willing to pay a price for the 
privilege of using it. Even the owner desires to own capital 
not because capital is itself capable of use later but because it 
is capable of adding to his income. If it added nothing to his 
income (that is, if, as the result of using it in his business, he 
was merely able to get back the original cost, that is, the prin- 
cipal), he would have no motive for owning it or using it. The 
more it will add to the productivity of his business, the more 
he will desire the use of it. 



426 PRINCIPLES OF POLITICAL ECONOMY 

Why capital is wanted. The productivity of capital, or the 
advantage of having the use of it, is subject to the principle 
of marginal productivity, as is the productivity of labor and 
land. If you increase the number of instruments of a given 
kind in any industrial establishment, leaving everything else in 
the establishment the same as before, you may within limits 
increase the total product of the establishment somewhat, 
but you will not increase the product in proportion to the 
increase in the number of instruments in question. If you in- 
crease all the instruments in a given industrial establishment 
without increasing the labor at the same time, each instrument 
will be used a little less intensively, or it will be idle a greater 
number of minutes per day, simply because of the scarcity of 
labor. On the other hand, of course, if you diminish the num- 
ber of instruments or the total equipment, leaving the amount 
of labor the same, each instrument, or each unit of the equip- 
ment, will have to be used more intensively. 

The productivity of capital decreases, other things being 
equal, as its quantity increases. Take a farm, for example. 
With a given labor force, the greater the number and variety of 
tools and implements, the less intensively each one is likely to 
be used ; and the smaller the number, the more intensively each 
is likely to be used. There are many farms on which it is found 
that there are such a number and variety of tools and implements 
that the farmer is really not getting any interest on a large part 
of his investment. Some expensive tools are idle so much of 
the year that they do not pay for themselves ; that is, the farmer 
never gets back the original price which he paid, to say nothing 
about getting interest on that price. On the other hand, there are 
other farms so poorly equipped that every tool in the farmer's 
equipment is used very intensively, and it would be money in 
the farmer's pocket to invest in additional equipment. For 
every dollar which he put into more and better tools, he would 
get back not only the original cost price but something in 
addition which could be called interest on the investment. 



THE SOURCE OF INTEREST 427 

That which is found to happen on farms is also found to hap- 
pen in larger industrial establishments, factories, railroads, etc. 

That which is true of an individual farm, shop, or other busi- 
ness establishment is also true of the community as a whole. 
If, for example, there are very few plows in a given community 
where there is an abundance of land, many laborers, and much 
other capital besides plows, each and every plow would be a 
matter of considerable importance ; it would be in general de- 
mand and would be used a great number of days in the year. 
Under these conditions you could say of that community, '' One 
more plow, considerably more product ;. one less plow, consider- 
ably less product" ; in short, the marginal productivity, in that 
particular community, of that form of capital called plows would 
be high. If, on the other hand, there were a great number and 
variety of plows in the community, other factors remaining the 
same, each one would be a matter of much less importance ; 
each one w^ould be idle a greater number of days in the year. 
Then you could say, '' One more plow, comparatively little more 
product ; one less plow, comparatively little less product " ; in 
short, the marginal productivity of plows would be low. 

Applying the same method of reasoning to other forms of 
capital or to all forms of capital, we reach the same conclu- 
sions. An abundance of all forms of capital, land and labor 
remaining the same, would give a low marginal productivity to 
capital ; whereas a scarcity of all forms of capital, land and labor 
remaining the same, would give a high productivity to all forms 
of capital. This would show itself in the case of liquid, or unin- 
vested, capital. Where all forms of capital are scarce, one hun- 
dred dollars invested in tools would add considerably to the 
productivity of the community ; but where all forms of capital are 
very abundant, then one hundred dollars invested in additional 
tools would be of comparatively little value. 

The following diagram will serve as an illustration of this 
law and also as a means of introducing the next question to 
be considered in the general problem of interest. 



428 PRINCIPLES OF POLITICAL ECONOMY 

Let the amount of capital in the industrial community be measured 

along the horizontal line AC; let the productivity of capital be measured 

along the perpendicular line AE; and let the descending line EC represent 

the rate of decrease in the marginal productivity of capital. If the amount 

_ of capital were measured 

by AD, the marginal 
productivity would be 
measured by the line 

BD, or AE. If the 

p I -n^ 

' -■^^' * amount of capital were 

y ^"^ P "^ measured by AD', the 

marginal productivity 
would, other things re- 
maining equal, be meas- 
ured by the line B'D\ 
or AE'-, and when the amount of capital equaled AV, marginal pro- 
ductivity would equal B" D'\ or AE". From this it follows inevitably 
that if capital went on increasing to AC, the marginal productivity of 
capital would be destroyed altogether. That is to say, the supply of capi- 
tal would have reached that limit where no more could be used to advan- 
tage, and some could be spared without loss.^ 

1 T. N. Carver, The Distribution of Wealth, pp. 223-224. The Macmillan 
Company, New York. 



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^-.5' 






~^^-.s'^ 
















































































■^^ 



CHAPTER XXXVI 

THE COST OF CAPITAL AND ITS PRICE 

Why capital is scarce. Seeing that the productivity of capi- 
tal, or its advantageous use, diminishes as the supply of capital 
increases relatively to other factors, and increases as the sup- 
ply of capital diminishes relatively to other factors, it is quite 
important that we should be able to account for the supply of 
capital as well as for its demand. Its demand, as has already 
been suggested, is based upon its desirability in production, 
that is, upon its productivity or the opportunity for its advan- 
tageous use. Unless, therefore, the supply were in some way 
limited, capital might become so abundant as to leave it with 
no marginal productivity. We found, when we were discussing 
the value of commodities, that the cost of producing them 
operated as a check on production and kept the supply within 
such limits as would give them a price approximately sufficient 
to pay the cost of production. Some factor must be found 
which will limit the supply of capital. 

The irksomeness of waiting. There are two factors which 
are obviously at work. One is the mere cost of producing the 
capital goods ; the other is the cost of waiting, or the disincli- 
nation which the average individual feels toward waiting. The 
cost of producing tools needs very little discussion. Unless 
the farmer's plow will return him, before it is worn out, 
enough to replace the price which he originally paid for it, 
he will of course have no motive for paying that price. If 
plows should become so numerous on a given farm that the 
farmer felt that he would probably never get back enough from 
a new plow, added to those already in use, to repay the price 
of that plow, it would be foolish for him to buy it. If every 

429 



430 PRINCIPLES OF POLITICAL ECONOMY 

farmer behaves in this way, certainly no more plows will be 
bought than can be used with that degree of advantage. If he 
has to pay fifty dollars for a new riding plow, and if he figures 
that in the course of its lifetime it will add only fifty dollars 
to his product over and above what he could produce with his 
existing equipment, then he would of course gain nothing from 
its purchase ; he would merely get back the original purchase 
price. If the average farmer had no disinclination toward wait- 
ing, it is probable that farmers would buy so many plows as 
to reduce the marginal productivity of plows to the level of the 
cost, that is, to the level of the purchase price. 

But suppose that the plow which cost fifty dollars will return 
the farmer only five dollars a year and will last ten years ; it 
then just replaces its original cost ; the farmer will have got 
back at the end of ten years the money which he put into it, 
and no more. Meanwhile he has had to wait ten years. If 
he did not mind waiting, — if waiting were not in the slightest 
degree irksome to him, — he would probably be willing to buy 
a plow under such circumstances, though there would be 
neither loss nor gain. If, however, he does not like to wait, — 
if he prefers present enjoyment to future enjoyment, — then he 
would hold on to his fifty dollars in the first place rather than 
spend it for something which will return fifty dollars in ten 
years' time. Under these circumstances he will certainly not 
buy the plow unless he has so few plows as to give a higher 
marginal productivity than that which we have been discussing. 
If he has so few plows that the possession of an additional 
plow will in the course of ten years add one hundred dollars 
to his income, he will add fifty dollars to his wealth during 
the ten-year period, — that is to say, fifty dollars will go to replace 
the purchase price of the plow ; the other fifty dollars is surplus. 
This and this alone is interest, and a rather high rate of inter- 
est, namely, lo per cent. But if every farmer is likewise disin- 
clined to wait, the market for plows will be limited. Only as 
many will be purchased as will yield a return large enough to 



THE COST OF CAPITAL AND ITS PRICE 431 

more than pay the purchase price. In other words, farmers in gen- 
eral will get some interest on that which they invested in plows. 

This may be illustrated by the following diagram. 

Let us suppose, as in the former diagram, that the number of imple- 
ments of a certain kind, say plows, is measured along the line AC, and 
their marginal productivity along the line AE. In this case, however, we 
mean their total marginal product during their average lifetime, or that 
amount which an average plow will add to the product of the community 
during its lifetime, over and above what could be produced without it. To 
distinguish this from the marginal product per year, we shall call it the 
total earnings of a plow. 
Letting the descending 
curve represent the de- 
cline in the total earn- 
ings of each plow as the 
number of plows in- 
creases, the line DB, or 
AF, would represent the 
total earnings of each 
plow when their number 
was represented by the 
line AD. When their 

number is AU, the total earnings of each would be UB^ or AF' ; and 
when the number is AD'\ the total earnings of each would be D" B'\ 
or AF'\ Let us further suppose that the cost of making plows is repre- 
sented by the perpendicular distance of the various points on the ascend- 
ing curve GB' above the base line A C. If this cost were the only check on 
the production of plows, there is no reason why they should not increase 
to the point IX , where the total earnings of each plow would just pay 
the cost of making the most expensive part of the total supply. They 
wo.uld sell at the uniform price of U B' , or AF\ which would be their 
normal equilibrium price. The total earnings of a plow would then just 
cover the price which the buyer would have to give for it.^ 

Why the present value of a productive agent is less than 
the future value of all its products. Now, as a matter of fact, 
people do not like to wait. Waiting is to some quite as irksome 



^— — ' "^ 

^^\^ 



1 T. N. Carver, The Distribution of Wealth, pp. 226-227. 
Company, New York. 



The Macmillan 



432 PRINCIPLES OF POLITICAL ECONOMY 

as working. It is also quite as necessary to efficient production. 
Anything, whether it be working, waiting, or risking, which 
is necessary to efficient production, and which at the same 
time is irksome, must be paid for. The fact that it is neces- 
sary for production furnishes a sufficient motive for paying for 
it ; the fact that it is irksome makes it necessary to pay for it, 
because men will not otherwise perform this function. In 
order that there may be an adequate supply of tools, which is 
necessary for efficient production, there must be waiting. Labor 
must be performed in the making of the tools, and then some- 
body must wait until they have been used for a number of 
years in order to get back from their use the equivalent of that 
which was originally expended in making them. If the laborers 
who make the tools are not themselves willing to wait, they 
may sell them to someone else, who then undertakes to wait 
for their products to mature. If both the laborers who make 
the tools and the one who purchases them are disinclined to 
wait, their market price will have to be something less than 
the sum of their future earnings. The laborers, being disin- 
clined to wait, will be willing to sell for a cash price somewhat 
lower than the total sum of the future earnings, and the pur- 
chaser will not be willing to pay a price which would equal 
the sum total of the future earnings. In the price-making 
process, therefore, the capital goods must necessarily sell for 
less than the sum of the future earnings. The buyer who 
holds them during their lifetime finds himself in possession of 
a surplus, which is his compensation for waiting. 

Take the case of a blacksmith who, by his own labor, makes a plow 
out of materials which cost him five dollars. Let us suppose that he can in 
a fortnight make a plow which will earn a total of thirty dollars during 
its lifetime of ten years. Deducting the cost of materials, this leaves him 
twenty-five as the net earnings of his fortnight's work ; but he must wait 
for his wages, receiving them in installments over a period of ten years. 
If he does not mind waiting, this will be no drawback, and he would just 
as lief make a plow as work for the same amount in cash or in present 
consumable goods. Or, having made such a plow, he would not sell it 



THE COST OF CAPITAL AND ITS PRICE 433 

for less than thirty dollars, the total amount which it will be expected to 
earn during its lifetime. 

But if he does mind waiting, and would much prefer to receive his 
wages at once, he would not make plows at all so long as he could earn 
twenty-five dollars per fortnight in present consumable goods. Or, having 
made a plow which will earn thirty dollars in the course of its lifetime, 
he would be willing to sell it for less than that amount, which, counting out 
the cost of the raw materials, would net him less than twenty-five dollars 
for his work. If no blacksmith could be found willing either to wait ten 
years for his wages or to accept less than twenty-five dollars for the amount 
of work necessary to make a plow, no ploughs with such small earning 
capacity would be made unless someone else could be found who did not 
mind waiting and who would therefore be willing to pay thirty dollars for 
a plow and then wait ten years to get his money back. But if no such 
person could be found, the making of plows would stop until their growing 
scarcity raised their marginal productivity and their total earnings somewhat 
above thirty dollars.^ 

Though it is not likely that anyone would be willing to 
wait ten years to get his money back, he might be willing 
to wait if he could get back not only the original sum of 
money but a surplus besides. The farmer, for example, 
might be willing to pay thirty dollars for a plow which would 
in the course of ten years earn him fifty dollars. The twenty 
dollars surplus would be interest. The problem, as it presents 
itself to the farmer who is contemplating investing money in 
a plow, is very much the same as the problem which presents 
itself to a lender who is contemplating lending money to some- 
one else. As a rule he prefers to keep his money rather 
than lend it, unless he can get a surplus by lending it. Every 
form of investment involves the same problem. The investor 
is compelled to give up something in the present — that is, 
either money or the opportunity to spend money for present 
goods — in order that he may have the means of securing the 
money or goods at some time in the future. The disinclination 
which is generally felt toward waiting is such that men will 

1 T. N. Carver, The Distribution of Wealth, pp. 229-230. The Macmillan 
Company, New York. 



434 PRINCIPLES OF POLITICAL ECONOMY 

not, as a rule, invest and wait unless there is a chance to get a 
surplus. The stirplus is then in a sense the reward for waiting. 

It is not to be assumed that there is anything inherently 
meritorious in waiting merely for the sake of waiting. The 
only merit there is in the process is in the increased . produc- 
tion which comes through the use of effective tools and 
equipment. Since, furthermore, one cannot provide one's self 
with effective tools and equipment without waiting or inducing 
somebody else to wait, we have a sufficient reason why waiting 
should be paid for when it results in increased production. 
If it does not normally result in increased production, there 
is no reason for waiting and therefore no reason why it should 
be paid for. 

Not all waiting is irksome. While it is true that, as a general 
rule, men are disinclined toward waiting (that is, they prefer 
present to future goods), still there is a certain amount of 
waiting which takes place normally without any great amount 
of sacrifice, and which therefore does not need to be paid for. 
There would be some saving even if no interest could be 
secured on savings. In fact, it is probable that a considerable 
amount of saving would take place even if men were com- 
pelled to hire vaults or storage places in which to keep their 
savings. In this case savings could be said to yield negative 
interest rather than positive interest. 

In so far as it is true that men estimate present consump- 
tion higher than future consumption, it applies only to the 
consumption of corresponding or similar increments of income. 
A man with a large income may be said to derive less utility 
from the last dollar of his income than from the others ; or, 
to put it in another form, he can lose one dollar of his 
income with comparatively little feeling of loss or sacrifice, 
but if, with the same general scale of wants, his income were 
much smaller, then the loss of a dollar would be more keenly 
felt. If his income is very large, he may find it difficult to 
spend it all on present consumption. In this case it may be 



THE COST OF CAPITAL AND ITS PRICE 435 

easier to save it than not to save it. To invest a little of one's 
large income, therefore, involves no cost or sacrifice whatsoever. 

On the other hand, anyone who is gifted with a moderate 
degree of foresight will look ahead and consider the possibil- 
ities of future emergencies. He may therefore lay up for a 
rainy day, for sickness, or for old age, even though there 
is no possibility whatever of securing interest on his sav- 
ings. If one who has a large present income foresees the 
possibility that at some future time his income may be cut 
off, he may reason somewhat as follows : ''I can spare the 
few unimportant luxuries which the last hundred dollars of 
my income will buy, without any appreciable sacrifice. At 
some future time this hundred dollars might supply my most 
pressing needs, if, I should find myself some day without 
an income. Therefore it will be very much better if I save 
this hundred dollars, and lay it up against that day, than 
if I consume it now." Another person, with a smaller in- 
come, would reason in the same way, though the sum which 
he would lay up would be smaller. And a person with a 
larger income would likewise reason in the same way, though 
the sum which he would lay up would be larger. Taking the 
whole community, especially if it contains a great many well- 
to-do people, a considerable mass of wealth would be saved 
for this reason alone. This kind of saving may be said, there- 
fore, to involve no cost ; and yet those who save in this way 
are able to secure interest on their savings, along with those 
who save at considerable sacrifice. 

Some capital accumulated without expectation of interest. 
If those sums which are saved in this way without sacrifice 
were sufficient to meet the demands of all communities for 
capital, such a thing as interest would not exist ; that is to 
say, if so much were saved in this way, and there were so few 
opportunities for using capital as to reduce the marginal pro- 
ductivity of capital to the minimum point, capital would practi- 
cally be a drug on the market. If, however, the opportunities 



436 PRINCIPLES OF POLITICAL ECONOMY 

for the productive use of capital are so great that more capital 
is demanded than can be saved without cost, then, in order 
to induce further saving, a surplus must be paid for its use. 

Interest a part of the general law of value and price. 
The price which is paid for the use of capital comes under 
the same law as the price which is paid for anything else. 
In the chapter on Scarcity it was pointed out that some goods 
are produced, under certain circumstances, practically without 
cost. Trout, where the fishing is good, are caught for the 
pleasure of the sport. If the number of trout that can be 
caught for pleasure is sufficient to satiate the desire for trout, 
then trout commands no price ; if this quantity is not sufficient 
to satiate the desire, and consumers are demanding more, then 
they must begin to pay a price to induce other fishermen to 
undertake the work of providing an adequate supply. The 
law here is the same as that which controls capital. Some 
capital will be accumulated without cost. There is probably no 
community in existence, however, in which enough capital to 
supply all demands is provided in this way. It is therefore 
necessary for all who need it to offer a price in order to in- 
duce a larger volume of saving than would take place if no 
interest were paid, — that is, no price for the use of capital. 

The cost of saving is like other forms of cost, ultimately a 
matter of psychology. Among people who are gifted with 
a large degree of forethought, saving is less irksome than it 
is among people who live mainly in the present. Among 
people of the latter class very little saving will take place 
unless there is a distinct reward for it. Among people of the 
former class a great deal of saving would take place even if 
there were no reward. A community with little forethought 
is therefore always a community in which interest rates are 
high, because there will be small accumulations of capital and, 
the supply being small, there is great need for more. It is 
the need for more of a thing which induces people to pay a 
price for it. 



THE COST OF CAPITAL AND ITS PRICE 437 

The functional theory of interest. This theory of interest 
may be called a functional theory of interest, to correspond 
with the functional theory of value and the functional theory 
of .wages, which have already been outlined. The function of 
a high price, as has been pointed out, is to call forth a larger 
supply ; the function of high wages is to induce a larger sup- 
ply of the labor which receives high wages ; and the function 
of a high rate of interest is to call forth a larger supply of 
capital for which interest is paid. A community that needs 
more capital can get it only by inducing larger savings. These 



N^ 



Interest 



Cost of Production 

I 



^--.5' 



K 



D' 



larger savings may be secured either by compulsion (that is, 
by taking a part of the social income by authority and setting 
it aside) or by attraction (that is, by offering a reward for saving) . 
There is no other possible way that has ever been suggested, 
even on paper, of accomplishing this necessary result. 

Let us assume that the amount of a certain kind of capital is measured 
along the line AC^ and its marginal productivity along the line AE, the 
descending curve EC representing the decline in the marginal productivity 
as the supply increases. If there were nothing to check its production 
but the cost of producing it, the supply would normally increase to the 
point D\ where the marginal product would just cover the marginal cost, 
and there would be no interest. This point is located by the intersection of 
the cost curve GB' with the productivity curve EC. But in addition to the 



438 PRINCIPLES OF POLITICAL ECONOMY 

-cost of production there is the disadvantage or sacrifice of waiting. The 
effect of this is illustrated by the rising curve HB. This curve represents, 
by its distance above or below the cost curve GB^ the positive or negative 
sacrifice of saving the different parts of the supply ^of capital. Where this 
curve is below the cost curve, it means that there is an advantage rather 
than a disadvantage connected with the exchange of present for future 
goods which saving implies. Where this curve coincides with the cost 
curve there is neither advantage nor disadvantage connected with saving, 
but when it rises above the cost curve there is a disadvantage connected 
with saving which becomes a check upon the production of capital in 
addition to that effected by the cost of producing it. 

If the production of capital should stop at the point K^ where, as shown 
by the intersection of the abstinence curve HB with the cost curve GB' , 
there is neither advantage nor disadvantage connected with saving, its 
marginal productivity would be represented by the line KL. This would 
give its owner an advantage far in excess of any disadvantage connected 
with its production, and this would stimulate its further production. But 
in order to increase its production it would be necessary to do more wait- 
ing as well as more work. From this point on, further waiting begins to 
be burdensome, acting as a positive check upon production. The normal 
tendency would be for capital to increase up to the point Z?, where the 
combined disadvantage of working and waiting, or of cost of production 
and abstinence, would be just compensated by the marginal productivity of 
that kind of capital. At this point the marginal productivity would be 
represented by the line DB, the marginal cost of production by the line 
Z?/, and the marginal abstinence by the line IB. The total present value 
of that kind of capital would then be represented by the parallelogram 
ADIF\ The total product of the present supply of capital during its 
lifetime would be represented by the parallelogram ADBF^ and the total 
surplus, or interest, by the parallelogram F'IBF. 

THE PURCHASER'S DEMAND FOR AGENTS OF PRODUCTION 

The same result is reached by approaching the subject from the side of 
demand, and regarding the disadvantage of waiting as reducing the pur- 
chaser's demand ^ for capital instead of checking its supply. It is, generally 
speaking, the amount which purchasers will pay for it which constitutes 
the reward of the makers of capital and serves as an inducement to con- 
tinue the work of production. So long as the purchaser's demand will give 
plows, for example, a price equal to the cost of producing them, the 

1 As distinguished from the borrower's demand. 



THE COST OF CAPITAL AND ITS PRICE 



439 



producers will continue their work. As already pointed out, if there were 
no disadvantage connected with saving, men might be expected to pay as 
much in cash for a piece of capital as they expect it to return them in the 
way of income during its lifetime. In that case the purchaser's demand 
curve for capital would coincide with the productivity curve of the fore- 
going diagram. There would then be an equilibrium of supply and demand 
at the point where the demand-productivity curve EC intersects the cost 
curve GB'. But since there is a certain disadvantage connected with 
saving, and men are not always willing — not even those who inveigh 



U 



\ 

\ 
\ 


B 


! \ 

1 \ 

Interest i \ 
1 \ 
1 \ 


;:>f... 


1 

Total Present 
Value of Capital 

1 


i ~'x, ■■■■-„ 



K 



M 



against interest on capital — to pay as much in cash, or present consumable 
goods, for a piece of capital as it will produce during its lifetime, the pur- 
chaser's demand curve does not coincide with the productivity curve, and 
the equilibrium of demand and supply is reached at some other point. 

This way of approaching the problem may be illustrated by means of 
the above diagram, which is a modification of the diagram on page 437. 
The purchaser's demand for capital is, in this case, represented by the 
descending curve HM, which bears the same relation to the productivity 
curve EC as the abstinence curve HB bore to the cost curve GB' in 
the last diagram. Where this demand curve is above the productivity 
curve, it means that men are so anxious to provide against the uncertainties 
of the future that they will give a larger number of present goods for the 



440 PRINCIPLES OF POLITICAL ECONOMY 

sake of having a smaller number at some time in the future, or that men 
of enormously large incomes would have so much trouble trying to consume 
them all that they would rather invest a part in some enterprise for the 
sport of carrying it through, even though they may never get all their 
money back, while men of moderate incomes would rather provide against 
a rainy day than to consume all their incomes, even though their savings 
shrink in the interval. Yet if the enterprises return a surplus, and the 
savings expand, both classes of savers will take advantage of the possibility 
of getting an increase. Where the demand curve coincides with the pro- 
ductivity curve, it means that there is neither advantage nor disadvantage 
connected with saving ; and where the demand curve falls below the 
productivity curve, it means that there is a disadvantage connected with 
saving, and therefore less will be paid for a piece of capital than it will 
earn in the future. 

Under these conditions the equilibrium of demand and supply, which 
determines the present selling value of agents of production, would be 
reached when the supply of capital was represented by the line AD, for 
this would be the point where the purchaser's demand for the different 
forms of capital would give them a value just equal to their marginal cost 
of production. Yet the marginal productivity of that amount of capital 
would be represented by the line DB ; the present selling value of capital, 
which is equivalent to the present value of its future product, would be 
represented by the Hne Z>/; and the surplus which would come to the 
buyer who took it at its present selling value and waited for its earnings 
to mature would be represented by the line IB. The total present value 
of all now-existing capital would be represented by the parallelogram 
ADF'I; its total future earnings, computed on the basis of its marginal 
productivity, by the parallelogram ADFB ; and the total interest or surplus 
which would come to those who buy the capital at its present value and 
wait for its product to mature would be represented by the parallelogram 
F'IFB. The annual interest would have to be computed by dividing this 
gross amount by the average lifetime of the now-existing capital. This 
v/ould give the lump sum going as interest to the owners of capital each 
year. The annual rate of interest would have to be computed by find- 
ing what percentage the annual interest is of the total present value of 
the capital.^ 

1 T. N. Carver, The Distribution of Wealth, pp. 242-249. The Macmillan 
Company, New York. 



CHAPTER XXXVII 

PROFITS 

What are profits? Profits may be broadly defined as the 
income of the independent business man who receives neither 
stipulated wages, rent, nor interest. In a somewhat narrower 
sense they include whatever he has left over after he has 
allowed himself interest on his own capital, rent for his own 
land, and wages for his own labor. This would seem to narrow 
the meaning of profits down to the reward for taking risk, 
though risk must be defined rather broadly. The enterpriser, 
as the independent business man may with fair accuracy be 
called, is essentially the man who undertakes something and 
relieves others of a part at least of the risk which they would 
otherwise have to take. 

It would be quite possible, for example, for a group of labor- 
ing men to borrow capital, build their own factory, and run it. 
But if they did so, they would always be in danger of losing 
not only what they themselves had invested, but even their wages 
for a time ; that is to say, if there should come a bad season, 
when the demand for products fell off, they might have to 
work for very low wages or for none at all. If some individual 
or group of individuals will undertake to run the business for 
them and guarantee them a certain fixed rate of wages, they 
are relieved of a part of that risk. 

Profits as payment for insurance. Again, the men who 
furnish the capital may jointly assume all the risks of the 
enterprise. They may, however, be in part relieved by having 
one individual or group of individuals undertake the business 
and guarantee them interest on their capital. In such a case, 
however, the enterprisers usually have to invest some of their 

441 



442 PRINCIPLES OF POLITICAL ECONOMY 

own capital. In such cases they, the enterprisers, put their 
own capital in the most hazardous position. This is virtually 
the distinction between common stock and preferred stock in 
a corporation. Those who own the common stock take the 
greater risk. So long as the enterprise is running at all, the 
owners of the preferred stock must get their interest, whether 
the owners of the common stock get anything or not ; but if 
the enterprise is very successful, the owners of the common 
stock get larger returns than the owners of the preferred stock. 
These larger returns over and above the rate of interest will 
be called profits. 

The lure of an enterprise. In a smaller business, run, let us 
say, by an individual rather than by a corporation, the individ- 
ual may borrow a part of his capital, and in this case, so long 
as he is in business at all, he must pay interest on what he 
borrows, whether he has anything left for himself or not. In 
case the business succeeds very well, he gets a surplus which 
may be called profit. The lender of borrowed capital gets no 
more than the stipulated rate of interest. It is the function of 
the independent business man or the enterpriser to insure the 
other participants in the industry against at least a part of 
their risk. Any income which the insurer gets over and above 
the normal rate of interest on the capital which he himself 
puts in may be called profit. This is the lure which induces 
men to undertake risks of this kind. 

This suggests a functional theory of profits which fits in 
with the functional theories of value, wages, and interest 
already described in the previous chapters. The function of 
high profits is to induce a larger number of rnen to undertake 
independent enterprises. Where a larger number of such 
enterprises are needed, there are only two ways of getting 
them started. One is for the community as a whole to take 
a part of the social income and by authority invest it in new 
enterprises ; the other is to offer a special inducement to pri- 
vate individuals to undertake the new enterprises voluntarily. 



PROFITS 443 

This is usually done by the offer, on the open market, of high 
prices for the products of the enterprise. 

Necessity of taking risk. Risk-taking is no more meritorious 
in itself than is waiting or working. It is meritorious only 
when it results in increased production and well-being. Still, 
the well-being of society or the increased production of the 
goods which society needs makes it absolutely necessary that 
some risks should be taken. Risk is therefore something which 
cannot be avoided. These risks are of many kinds and degrees. 
The tastes of the people may change so that the product 
which is to be produced may be no longer desired. Some 
new invention may render obsolete the processes used and 
the machinery which has been installed. Strikes, insurrections, 
wars, and unforeseen physical calamities, such as fires, storms, 
and earthquakes, must also be taken into account. It would 
be very difficult to imagine any productive undertaking that 
did not involve risk. In the case of the farmer, bad weather, 
insect pests, and diseases of all kinds threaten to decrease or 
destroy his income. Risk-taking is therefore as necessary as 
working or waiting in order to get effective production 
under way. 

Irksomeness of risk. Unless, however, risk-taking were in 
some way irksome or disagreeable, it would not deter men 
from entering business, and there would be nothing here that 
would have to be paid for. That is to say, if people liked to 
take risks, there would be no hesitancy in entering a risky 
occupation. It would therefore not be necessary to offer a 
reward to induce men to enter it. But since risk-taking is 
irksome or disagreeable, since men would rather not hazard 
their accumulations and their present income, they must be 
paid something as a lure, or attraction, to overcome this disin- 
clination. The reason here is precisely the same as the reason 
for paying wages or interest, or for paying the price of any 
commodity. The function of price, in a free country, is to 
overcome the disinclination to work, wait, or to take risks. 



444 PRINCIPLES OF POLITICAL ECONOMY 



NOT ALL RISK IS IRKSOME 

It is not to be inferred, however, that all risk is burdensome. The 
gambling instinct is so strong in some people that they will eagerly hazard 
their wealth on chances which they know to be against them purely for the 
excitement of the hazard. Different individuals differ greatly in this par- 
ticular, but in general it will be found that small sums will be risked on the 
chance of winning large ones more readily than large ones will be risked on 
the chance of winning small ones, even when the chances in the latter cases 
are more than proportionally superior. So great is the preference for the 
former class of hazards that a great many men — one might almost say the 
majority of men — will risk $i on the chance of winning $1000, even when 
it is well known that there are 2000 chances to one against their winning. 
That is why lotteries flourish where they are not suppressed by law. But 
very few will risk $ r 000 on the chance of winning $ i , even if they know 
that there are 2000 chances to one in favor of their winning. If a company 
should offer to sell 2000 tickets at $1000 each, only one of which was a 
blank, all the rest drawing prizes of $1001 each, it would be making a 
better offer than any lottery ever has made or ever could make ; but it 
would probably not be able to induce 2000 individuals to buy tickets. And 
yet such a company would be offering a good risk, as risks go, and anyone 
who kept on buying them would gain in the long run, though he might lose 
all his money on the first venture. 

DIFFERENCE BETWEEN GAMBLING AND LEGITIMATE 
RISK-TAKING 

Things are happening all around us every day which cannot be foreseen. 
We can therefore very easily discover or invent ways of taking risk that 
have no connection whatever with production or any kind of useful work. 
Men may bet upon the weather, the speed of horses, the outcome of an 
election, the way a flipped coin will fall, or which way a cat will jump, but 
in none of these cases is there anything accomplished as a result of the 
wager, except the transfer of money from one person to another. These 
are pure gambling risks and have no connection with any economic function. 
The farmer takes risk when he plants seed. He does not know what the 
weather will be, how late the frosts will come in the spring or how early 
in the fall, what insect pests may destroy his crop, what thieves may steal 
it, nor what other circumstances, fair or unfair, may occur. Nevertheless, 
if no one were willing to take such risks, we should never have any food. 
This kind of risk-taking cannot properly be called gambling. The manu- 
facturer likewise, when he erects his building, fills it with expensive 



PROFITS 445 

machinery, and hires his help, does not know how soon a change of fashion 
may upset his calculations, how soon a strike may occur to stop his produc- 
tion, when financial panic or industrial depression may cause his prospective 
customers to stop buying, or when a change of government policy or some 
other fortuitous circumstance may send him into bankruptcy. If no one 
were willing to take such hazards, consumers would have no manufactured 
products, and labor would have no employment. Such risk-taking, again, 
could not be called gambling. It is absolutely necessary to the normal work 
of production. In short, a hazard of money or anything else of value, on a 
chance which is not necessary to production, is gambling; a hazard on 
work which is necessary is not gambling but legitimate risk-taking. 

ORDINARY INDUSTRIAL RISKS ARE IRKSOME 

Outside of mining and a few extrahazardous enterprises, industrial and 
commercial risks belong in the class where relatively large sums must be 
hazarded on the chance of small gains. Such risks do not appeal to the 
gambling instinct, and consequently they do not attract men except where 
the chances are good in the long run — that is, where the gains, on the 
whole, considerably exceed the losses. Those who embark on such enter- 
prises will, in the long run, receive profits ; but in such extrahazardous 
enterprises as appeal to the gambling instinct, by the chance of large gains 
from small investments, men are so overanxious to invest that the losses, 
on the whole, exceed the gains, and there are no profits for such men as a 
class, though of course a few win large prizes. It is in the former class of 
enterprises that the " irksomeness of risk " deters men from embarking, 
reduces competition, and improves the chances of those who have the 
foresight or the hardihood to enter.i 

Relation of risk to abstinence. There is a close parallelism 
between the part played by risk in the determination of profits, 
by abstinence in the determination of interest, and by cost pro- 
duction in the determination of the price of a reproducible 
commodity. It was pointed out in Chapter XXXVI, on The 
Cost of Capital and its Price, that the necessity of waiting, 
combined with the fact that waiting beyond a certain point is 
disagreeable, tended to reduce the present price of a piece of 
capital to something less than the sum of its future earnings. 

1 T. N. Carver, The Distribution of Wealth, pp. 282-283. The Macmillan 
Company, New York. 



446 PRINCIPLES OF POLITICAL ECONOMY 

The one who buys it at its present selHng price and waits for 
its earnings to mature will normally and in the long run find 
himself in the possession of a surplus as the result of his wait- 
ing. Since men are generally disinclined to waiting, they never 
bid against one another for the possession of future goods vig- 
orously enough to raise their present price to the level of the 
sum of their future earnings. The result of this is that the 
normal selling price of a piece of capital is low enough to 
allow its purchaser a surplus. In a similar way the risk con- 
nected with carrying on any enterprise, particularly a new 
enterprise in a changing society, may reduce the present value 
of the whole equipment somewhat below the probable value of 
its products even after allowance is made for interest. Because 
of the general disinclination to assume risks of the kind ordi- 
narily met with in business, the competitive investments, that 
is, the competitive buying of productive goods and embarking 
on productive enterprises are less intense than they would other- 
wise be. It is for this reason that those who undertake such 
enterprises may be expected, in the long run, to secure a profit 
over and above the interest on the capital which is invested. 
It was also pointed out in Chapter XXXVI that not all 
waiting is irksome, and that some waiting is done without 
any hope or expectation of surplus income. The parallelism 
between risk and waiting may be carried a step farther. Not 
all risk is irksome. Some risks are undertaken for the sake of 
the excitement. Boys sometimes like to skate over thin ice just 
because it is dangerous. Men sometimes like to gamble their 
money just because it is dangerous. All sorts of risks are taken 
for the sheer excitement of the hazard. When you find a busi- 
ness enterprise which appeals to the gambling instinct, men 
will be found so eager to buy or to invest in the risk as to give 
it a market value somewhat greater than its mathematical or 
economic value. Those who persist in buying such risks invari- 
ably lose in the long run, though they may now and then win 
on some individual venture. 



PROFITS 447 

Egotistic belief in luck. Adam Smith long ago pointed out 
that men are not only egotistical regarding their own abilities, 
but that generally they are rather fond beUevers in their own 
luck. Even though they are convinced that mathematically the 
chances are against them, their egotism leads them to believe 
that their own luck may offset the effect of mathematics. Of 
all superstitions the belief in luck is one of the most wide- 
spread. It is this sort of superstitious egotism on which the 
professional gambler and the lottery flourish. 

Relation of the market to the mathematical value of a risk. 
In the case, however, of an enterprise which does not appeal 
to the gambling instinct, men are generally so reluctant to 
invest that the market value of the risk is usually somewhat 
less than its mathematical value. Men who persist in buying 
such risks inevitably gain if they continue long enough and if 
they are not ruined by their early losses. In the class of risks 
which appeal to the gambling instinct, the more one invests the 
more certain one is to lose. If one were to buy all the lottery 
tickets, one would be absolutely certain to lose, because the 
lottery sees to it that the price of all the tickets exceeds the 
value of all the prizes. In the other class of risks, namely, 
those which do not appeal to the gambling instinct, the market 
value is less than the mathematical value, as already stated. It 
follows from this that if you were to buy all such risks, you 
would be absolutely certain to gain, for the sum total of the 
market values is less than the sum total of all the mathemati- 
cal or economic values. Those who invest in the gamblers' 
risk as a class lose rather than gain ; those who invest in the 
ordinary business risks as a class gain rather than lose. 

The question of the residual share. In view of all that has 
been said, it is safe to conclude that profits are made up of 
what is left after the other shares are paid. This does not 
mean, however, that profits are a residual share. This term 
residual share has been discussed in a good many treatises 
on economics. By a residual share is meant the only share 



448 PRINCIPLES OF POLITICAL ECONOMY 

which is not determined independently. It has sometimes been 
argued, for example, that inasmuch as rent is determined by a 
law of rent which works independently of other laws of distri- 
bution, and since wages are determined by the standard of 
living which likewise is supposed to work independently of 
other laws of distribution, and since the rate of interest tends 
to work uniformly through the community, regardless of minor 
changes, profits are therefore undetermined by any law but 
are merely what is left over after the other shares are accounted 
for. It is quite as easy to show that any other share is a 
residual share in this sense as it is to show that profits are a 
residual share. 

Many years ago Walker pointed out that profits are deter- 
mined by a law similar to the law of rent as applied to land. 
Profits, according to this law, are determined by the difference 
between the productivity of a given business man and that of 
the least efficient business man who could manage to stay in 
business. The latter was called the no-profit business man or 
entrepreneur, and he occupied a position analogous to the no- 
rent land on the margin of cultivation. A more efficient busi- 
ness man, however, could reduce the cost of production somewhat 
lower than this no-profits man, or else produce a better product 
which would sell at a higher price. Herein lay his opportunity, 
and his only opportunity, for profits. Assuming that he paid 
the same rate of wages and interest and a rent which was pro- 
portional to the advantage of the site, his only chance of doing 
better than the other man was to organize these factors more 
effectively and to supervise them more diligently by effecting 
economies which the other man was unable to effect. He 
would then find himself in the possession of a surplus. Be- 
ginning with profits and accounting for them by this differen- 
tial law, Walker proceeded to show that rent and interest were 
also determined by definite laws. This left only wages to be 
accounted for. Therefore he assumed that wages were a 
residual share. 



PROFITS 449 

One may, however, prove by the same process that either 
rent or interest is a residual share. It all depends on which 
share you consider last in the series. The result of this, 
moreover, has resolved the whole doctrine of a residual share 
into an absurdity. Since the independent business man, or the 
entrepreneur, is the only one whose income is not the result 
of specific bargaining, and since he is the only one who does 
not sell his services for a definite price, he may be said to re- 
ceive whatever is left over. The laboring man bargains for a 
definite rate of wages ; whether the business is making a profit 
or a loss, he gets these wages as long as the contract stands. 
The capitalist lends his capital at a definite rate of interest 
and gets that rate of interest so long as the business keeps 
going, whether it is making a profit or a loss. Similarly with 
the landowner. But the entrepreneur is the only one whose 
income hinges on the question of profit or loss for the business 
as a whole. 

The business man the chief bargainer. Every participant in 
a competitive enterprise is more or less a bargainer, but the 
independent business man is the chief bargainer of all. When 
the laboring man has bargained for a rate of wages, the rest of 
his work consists not in bargaining but in working ; and when 
the capitalist has bargained for a rate of interest, that is the 
end of his bargaining ; so with the landlord. But the inde- 
pendent business man is the bargainer per se ; he bargains for 
everything, — his raw materials, his help, his capital, his inter- 
est, — and he also bargains with the purchasers of the product. 
He is the unbought buyer of everything and the unsold seller 
of everything connected with the business. It therefore hap- 
pens that skill in bargaining is one of the greatest elements in 
his success in securing profits. Bargaining, however, consists, 
in the first place, in investing, and the investment of capital 
is a very delicate operation. To invest successfully one must 
foresee the future needs of the community as expressed in the 
demands of the market. To err at this point is to fail. 



450 PRINCIPLES OF POLITICAL ECONOMY 

Because of the disinclination of the average man toward 
taking the ordinary business risk, the competition is somewhat 
intense for the safe positions of the laborer and the lender of 
capital. The intensity of this competition tends to keep their 
shares somewhat lower than they would otherwise be, but this 
disinclination makes the competition somewhat less intense 
among the business men who have to assume the chief risks. 
This, in turn, leaves them with somewhat larger incomes than 
they would get if the risks were less irksome and the competition 
more intense. The surplus income which comes to them in 
this way is called profits. 



PART FIVE 
THE CONSUMPTION OF WEALTH 

Which has to do with the utilization of wealth in the satisfaction of human 

desires, and the reaction of this utilization upon the general prosperity and 

strength of the nation 



451 



CHAPTER XXXVIII 

MEANING AND IMPORTANCE OF CONSUMPTION 

Two meanings of the word consumption. There have been 
two meanings given by economists to the term cojtstimption of 
wealth. By one group it has been made to include any utiH- 
zation of wealth in which the wealth is worn out, used up, or 
destroyed in the process ; by another group it is defined as 
meaning only such utilization as gives direct satisfaction to a 
consumer. Under the first definition coal is consumed when 
it is burned to make steam for the running of machinery as 
well as when it is burned to supply warmth for the comfort 
of the human body. Under the second definition only the 
latter use of coal would be called consumption. Those who 
hold to the first definition are compelled to divide consump- 
Ijtion into two kinds, namely, productive consumption and un- 
productive consumption. It is always explained, however, that 
the term unp7^oductive consumption does not mean useless or 
unnecessary consumption. It means that wealth thus consumed, 
in contradistinction to that which is productively consumed, is 
not used up in the process of producing other wealth. It is 
used rather for the final purpose for which all wealth is com- 
monly supposed to be produced, namely, the direct satisfaction 
of human desires or needs.^ 

The tendency among recent writers is to use the term con- 
Isumption in the narrower sense. By the consumption of wealth 
'under this definition is meant the culmination of the whole 
economic process, namely, the satisfaction of human desires. 
Wealth which is worn out or used up in the process of 

1 Compare the author's article on " Consumption " in the Encyclopedia 
■Americana. 

453 



454 PRINCIPLES OF POLITICAL ECONOMY 

production is not itself yielding satisfaction to consumers 
directly. It is yielding it indirectly, or helping to produce 
other things which will satisfy consumers directly. 

The purpose of the user is the determining factor. Under 
modern conditions goods are used either for direct satisfaction 
or for the getting of an income. If they are being used for 
the getting of an income, they are not being consumed in the 
economic sense. The physician's automobile which is used in 
his profession is being worn out, but it is not being consumed 
in this sense. When the same automobile is used for his own 
enjoyment or that of his family, it is being consumed. Again, 
a thing may be in the process of consumption even though it 
is being used up very slowly. A diamond which is used as an 
article of pleasure or adornment is in the process of consump- 
tion, even though it may never be really worn out ; but when 
it is a part of the stock of the jeweler, like the rest of his stock, 
it is being used for the purpose of getting an income. A sub- 
stantial piece of furniture, when used for direct satisfaction, is 
being consumed ; but while it is in a furniture store, the imme- 
diate purpose of the owner is to gain a profit from it rather 
than to enjoy it, and therefore it is not yet in the process of 
consumption. In short, the consumer of an article is the one 
whose desires it satisfies directly. The article begins being 
consumed whenever it begins satisfying a consumer's desires 
directly, that is, when it has passed through all the channels 
of business and trade, where it is used for the purpose of 
getting an income, and comes into the possession of someone 
for whose satisfaction it is designed. 

Importance of consumption. Most textbook writers on eco- 
nomics have regarded the consumption of wealth as a depart- 
ment of the subject coordinate with such departments as 
production, exchange, and distribution. None of them, however, 
has given as much space to it as to those other departments. 
The reason has apparently been the general opinion that con- 
sumption is essentially an individual matter, with which the public 



MEANING AND IMPORTANCE OF CONSUMPTION 455 

has had Httle or no concern. Laws relating to consumption 
have been called sumptuary laws, and have generally been con- 
demned or only half-heartedly approved. There is a growing 
opinion, however, that consumption is quite as important, from 
its effect on national prosperity, power, and greatness, as any 
department of economics. Even the regulation of consump- 
tion, as in the case of laws regulating or prohibiting the use of 
alcoholic beverages, is becoming popular. Probably no move- 
ment of the present day in America is quite so popular or so 
democratic as the prohibition movement. 

The importance of the consumption of wealth is further 
emphasized by the consideration that as many and as dire 
calamities have overtaken nations and peoples because of their 
irrational habits of consumption as because of inefficient sys- 
tems of production, exchange, or distribution. In fact, con- 
sumption reacts powerfully upon all the other departments, 
particularly upon distribution. The standard of living of the 
laboring classes, which is a part of consumption, has much the 
same influence upon the price of their labor as that exercised by 
the cost of production upon the price of a material commodity. 
Again, the rate of the accumulation of capital, upon which so 
many things depend, is largely determined by the habits of 
consumption. The effect of luxury upon industry and general 
national strength is one of the largest of all questions. These 
illustrations are enough to show that the subject of consump- 
tion deserves the most careful study and the most serious 
treatment which economists can give it. 

Ratio of consumption to production. In a profound and illu- 
minating article on War and Economics,^ Dr. E. V. Robinson 
calls attention to the fact that in any country, when its produc- 
tion exceeds its consumption, the result is economic progress, 
but that when consumption exceeds production, the result is 
economic retrogression. When production exceeds consump- 
tion, wealth is accumulating and taking on durable forms ; when 

1 Political Science Qtcarterly, Vol. XV (December, 1900), p. 581. 



456 PRINCIPLES OF POLITICAL ECONOMY 

consumption exceeds production, the national wealth shrinks, 
and the nation lives on its accumulated capital and, moreover, 
allows its accumulated fund of durable wealth to deteriorate. 
Since it spends no time in keeping its durable wealth in repair 
or its volume intact, but spends all of its time in producing 
ephemeral goods for immediate self-gratification, its great archi- 
tectural monuments, if it has any, sink into decay ; no time 
is spent in preserving them. Its buildings become dilapidated 
for the same reason. Its soil becomes depleted because no 
energy is spent in conserving its fertility. The people live as 
it were from hand to mouth, and everything tends downwards. 

When production exceeds consumption, on the other hand, 
not only are durable forms of wealth conserved — kept in repair 
and intact — but they are continually improved and new forms 
produced. There is energy to spare from the work of produc- 
ing ephemeral articles for immediate consumption. Here time 
is devoted to permanent works and new forms of construction. 
Durable goods multiply in quantity, capital accumulates, more 
and better tools and equipment are provided, and productive 
power accumulates by a kind of geometrical progression. 

Whether, in the nation at large, production exceeds con- 
sumption or not depends on the general habits of the average 
person. If the average person demands large quantities of 
those things which supply physical and temporary satisfaction, 
such as luxurious food and drink, fashionable clothing, and 
expensive amusements, there will be a tendency for consump- 
tion to exceed production. If, however, the average citizen is 
satisfied with the kind of food which nourishes, and increases 
strength and efficiency, with clothing which affords comfort and 
convenience, with amusements which are inexpensive and which 
tend to preserve the health, strength, and agility of both mind 
and body, there will be a tendency for wealth to accumulate. 

Other factors are, however, involved. There might be a 
population with simple habits such as we have indicated, but 
with no desire for the durable satisfactions of life and with 



MEANING AND IMPORTANCE OF CONSUMPTION 457 

I little energy to be devoted to production. Such a population 
would necessarily remain in a low state of civilization. It would 
not provide abundantly either for the temporary or for the per- 
manent means of satisfaction, but would remain in sloth and 
squalor. But if, in addition to the simple habits of consump- 
tion so far as food, clothing, and amusements were concerned, 
the average person possessed an intense desire for durable 
goods, — for architecture, libraries, schools, and other civilizing 
agencies, — the conditions would be favorable to the accumulation 
of wealth and to all forms of economic progress. If, in addi- 
tion to all these, the average person were energetic and not 
disinclined toward work, — if he were willing to study hard 
and work hard, and if his motives were such as to drive his 
mind and body at high speed, — the conditions would be still 
more favorable. This combination of favorable conditions would 
make progress almost inevitable. Nothing except a geological 
cataclysm or a world war would prevent such a people from 
advancing in the arts sDf civilization. 

Preference for durable goods. It is to be borne in mind that 
the motives and desires of people are fundamental to this prob- 
lem. Any people can have as much progress and as high a 
state of civilization as they desire, provided they desire them 
strongly enough and are willing to pay the price. If the peo- 
ple of ancient Athens had preferred to spend their time, their 
energy, and their money on ephemeral satisfactions rather than 
on the architectural adornment of their city, they could have 
done so. If they had so chosen, they could probably, for sev- 
eral centuries, have consumed somewhat more luxurious food 
and drink, worn more expensive clothing, and amused them- 
selves in more costly ways. But because they chose rather to 
spend their money and their energy on durable goods, they 
left the world richer than they would have done if they had 
made the ignoble choice. 

The same comment may be made upon the people of vari- 
ous medieval cities, who cared so much for their religion that 



458 PRINCIPLES OF POLITICAL ECONOMY 

they were willing to spend their money, time, and energy in 
building cathedrals as monuments to their religious faith. They 
could have chosen otherwise. They could for centuries have 
had more luxurious food and drink, adorned their bodies with 
more expensive clothing, and had- more of their time for self- 
amusement. But they did not choose in this way, and because 
they did not, the world still possesses their great architectural 
monuments. Similarly, any city of to-day can be as fine and . 
beautiful as it wants to be, provided it is willing to pay the 
price. If it chooses not to build durable forms of satisfaction, 
it may go on consuming luxuries in many forms, and it may 
go on amusing itself, multiplying holidays, and enjoying vari- 
ous other forms of waste ; but if it is willing to live on the 
products of a part of the people, in order that the remain- 
der may be employed in building for the future, there need 
scarcely be any limit to its possibilities for civilization and cul- 
ture. If it chooses to follow the example of those cities of the 
past that became great and left something to show that they 
once existed, — something to justify that existence, — it will 
merely be choosing to consume from day to day, and from gen- 
eration to generation, less than it produces, in order that a part 
of the productive energy of each generation may build for the 
future. That spells progress. If it chooses otherwise, it will 
never leave anything to show to future generations that it once 
existed, much less to justify that existence. The life history of 
its citizens could be briefly summarized in these words : They 
were born to breed and die, like the insects of the hour, gen- 
eration after generation, in endless and unprofitable repetition. 

Value of a man. From the standpoint of progress the value 
of the individual depends on the excess of his production over 
his consumption. The following formula will determine with 
mathematical accuracy how much a person is worth from the 
standpoint of national prosperity : V= P— C. 

In this formula V stands for value, that is, the value of the 
man ; P stands for his production ; C, for his consumption. 



MEANING AND IMPORTANCE OF CONSUMPTION 459 

Thus the formula reads, The value of the man equals his 
production minus his consumption. In the cases where his 
consumption exceeds his production his value is negative ; 
he is a drag on progress, and the world will at least save 
his victuals when he leaves it. 

The whole life is the unit. Lest this be too hastily inter- 
preted, it should be pointed out that a human life as a whole, 
and not a fragment of it, should be regarded as a unit. The 
consumption of a child exceeds his production ; but this does 
not condemn him. So, likewise, during the declining years of 
those who reach a good old age, consumption may exceed 
production ; but this does not condemn the life. If the life as 
a whole produces more than it consumes, it leaves the world 
richer by that difference. 

Again, production should be given a very wide interpre- 
tation. One may produce without handling material goods of 
any kind, but by inspiring the productive virtues in others, 
by teaching productive skill to other people, by scientific inves- 
tigation, by transmitting knowledge, and in various other ways. 
If, after making all allowance for these different forms of pro- 
ductivity, the mature individual in sound health finds that he 
is producing less than he is consuming, it is time for him to 
begin to consider his ways and to experience a change of heart. 
He needs to be converted from a waster into a producer. 

Boarders at the national table. Dairymen sometimes use 
the term boarder to describe a cow whose feed and care cost 
more than her. milk is worth. Every wise dairyman tries to 
get rid of his boarders and keep only those cows whose produc- 
tion exceeds their consumption. The formula V=P— C applies 
very clearly to the value of the cow. A wise farmer would 
not keep a horse whose production did not exceed his con- 
sumption. A manufacturer would discard a machine which 
required so much power, care, oil, repairs, etc. as to exceed 
the value of its product. It would seem that men ought to be 
held to at least as high a standard as that to which cows, 



46o PRINCIPLES OF POLITICAL ECONOMY 



1 



horses, and machines are held. A man who falls below that 
standard is as much of a drain upon his country as is the cow, 
horse, or machine. 

The class of boarders includes not simply the tramps and 
beggars but everyone else who is not usefully engaged, even 
though he or she lives upon his wife's or her husband's earn- 
ings, his wife's or her husband's fortune, or upon inherited 
wealth. The class includes even others. Even those who are 
somewhat usefully engaged may be consuming such expensive 
products, and may require so many servants to wait upon them, 
as to use up more man power than they replace by their own 
work. As a mere exercise in patriotism, therefore, every ma- 
ture person should ask himself seriously whether the country is 
the gainer or the loser by reason of his existence, whether the 
cost of keeping him is greater than the advantage, whether 
the man power required to produce for him and take care of 
him is not greater than the man power which he contributes 
to the nation's fund of productive energy by his own work. 

The conservation of man power. The importance of this con- 
sideration is peculiarly clear at the moment when this is being 
written (December, 191 7), when all the liberal nations are at 
death grips with a military autocracy whose limitless ambition 
threatens to overwhelm the democratic world. The necessity 
of conserving every ounce of our man power is upon us. We 
see clearly now that anyone who is not usefully engaged is a 
menace rather than a help to us in the struggle. The food 
alone which such a person consumes is acutely • needed, to say 
nothing of the man power which he requires in other ways. 

Even those who are usefully engaged ought to feel that luxu- 
rious consumption on their part is an interference with the 
plans and purposes of their country. To consume unnecessary 
luxuries is to require an unnecessary quantity of man power to 
produce for us. This is little short of a crime when that man 
power is so intensely needed for the trenches, for the war 
industries, and for food production. 



CHAPTER XXXIX 

RATIONAL CONSUMPTION 

Difference between a high and a rational standard of living. 

Economists have generally classified standards of living on the 
basis of their cost or expense. A high standard of living has 
meant merely an expensive standard ; a low standard of living 
has meant simply a cheap standard. Very little attention has 
been given to the difference between a rational and an irrational 
standard. By a rational standard of living is meant one which 
increases the margin between one's production and one's con- 
sumption. In the formula V=P—C, as given in the pre- 
ceding chapter, the most valuable man is one in whom P 
exceeds C by the greatest margin. The purpose of the present 
chapter is to contend that the most rational standard of living 
is one which produces the most valuable man. 

This margin of difference between P and C would be in- 
creased, of course, either by decreasing C, by increasing P, or 
by doing both at the same time ; that is, if, without reducing 
in any degree a man's efficiency as a producer, he were to re- 
duce his cost of living, he would thereby be adding to his 
value from the standpoint of progress. To that extent he 
would enable the community to produce more than it con- 
sumed. He would thus be a factor in the accumulation of 
productive power or of the durable products of civilization. If, 
however, by reducing his cost of living, he at the same time 
reduced his productive efficiency in the same proportion, 
there would, of course, be no gain, and there might be some 
loss involved. If, on the other hand, by spending more on 
himself, especially on books and other means of education, on 
tools, or on more nourishing food, he were able to increase 

461 



462 PRINCIPLES OF POLITICAL ECONOMY 

his productive efficiency, his increase in consumption would 
more than justify itself. 

From this point of view the problem for every individual 
is to adopt that standard of consumption which will leave the 
largest margin between production and consumption. From 
the same point of view it would frequently be necessary that 
one man should spend more on himself than another would be 
justified in doing. Take, for example, a great surgeon, whose 
time is exceedingly valuable, not only to himself but to the 
community he serves. He might very properly keep an auto- 
mobile, a chauffeur, and other time-saving devices and agencies. 
He might even keep a valet to look after his clothes. If these 
forms of expenditure would enable him to give more people 
the benefit of his skill, it would be to their advantage for him 
to spend money in these ways. This applies to all others 
whose time and services arc valuable to the community. For 
the same reason he might, by increasing his consumption in 
various ways, increase his production more than enough to pay 
the added cost of his living. But an inexperienced surgeon, 
whose time is not valuable to the community, — who, in fact, 
has time to spare, — could not properly indulge in the same 
time-saving devices. For such a person to employ a valet or 
even a chauffeur would be ridiculous waste and ostentation. 

Buying trinkets is not good for business. In opposition to 
this point of view there is a popular theory to the effect that 
lavish expenditure is somehow good for business. The diffi- 
culty with this argument is that it always assumes that if the 
individual is not consuming lavishly, he is not spending but 
hoarding his money. It is surely as good for business and 
labor that one should spend money on builders and architects 
as on milliners and confectioners. He who consumes lavishly 
spends his money on confectioners, milliners, and other pro- 
ducers of immediate and temporary satisfactions. He who con- 
sumes rationally spends as much money as he who consumes 
lavishly, but spends it on things which build and improve, 



RATIONAL CONSUMPTION 463 

rather than on things which merely afford temporary gratifi- 
cation. A community of lavish consumers would, of course, 
give actual employment to those whose work is to amuse and 
gratify, but little employment to builders and others producing 
for future generations. A community of rational consumers, 
on the other hand, would give more employment to those who 
build for future generations, and less to those whose work is 
to gratify the interests of the immediate present. There is no 
essential difference in the amount of money spent in the two 
cases, provided the two have equal quantities of money to 
spend. The difference is in the way they spend it and in the 
direction they give to enterprises and industry. The com- 
munity that spends money in building for future generations 
will improve from generation to generation ; each generation 
will inherit from the preceding one a larger fund of durable 
wealth, and will add to this and bequeath a still larger fund 
to successive generations. 

Buying durable goods is investing for the future. If we 
were to start these two- communities side by side, with equal 
numbers and equal natural resources but with different habits 
of consumption, it would not be many generations before a 
marked difference could be seen between the two communities. 
The community which spent its income for immediate gratifica- 
tion would fall behind the one which spent a part in building 
for the future. It would not be many generations before the 
latter community would outstrip the former, and the people 
from the former would be emigrating to find employment and 
other advantages in the latter. 

The miser and the spendthrift. Instead of placing the miser 
and the spendthrift in opposite categories, we should really put 
them together. The miser is a lavish consumer in a most im- 
portant sense. A consumer is defined as one who uses wealth 
for his immediate gratification. In a previous chapter con- 
sumers' goods were defined as goods used for direct and im- 
mediate satisfaction. Now a miser, instead of using his wealth 



464 PRINCIPLES OF POLITICAL ECONOMY 

productively, keeps it for his direct and personal enjoyment. 
With extreme gratification he counts his hoard. He loves to 
handle it, to see it glitter, and to hear it jingle. He is in the 
strictest sense a consumer of gold. He is very much like the 
spendthrift in that he gives up everything in order to get gold 
and to enjoy it personally, just as the ordinary spendthrift gives 
up everything for personal enjoyment of other kinds. If, in- 
stead of hoarding his gold in his cellar, our traditional miser 
were to use it in gilding his house, no one would doubt that he 
was a spendthrift. Whether he hoards his gold in his cellar or 
uses it for purposes of adornment makes very little difference. 
The same amount of gold is withdrawn from circulation, and 
much the same effect on the market is produced in either case. 

Both the miser and the spendthrift should be contrasted 
with the rational buyer, or the investor in durable goods. The 
true investor buys goods of which he himsdf will probably 
never be able to absorb the full utility. He buys goods that 
will last so long that future generations will get a part of their 
utility. Those future generations will • therefore have a better 
start than he did. If this is kept up indefinitely, generation 
after generation, by all members of the community, it will be 
a very prosperous and progressive community ; but if each 
individual of each generation merely says, '' What has posterity 
ever done for me that I should be called upon to do anything 
for posterity? Let us eat, drink, and be merry!" that will 
always be a backward community. 

The case of rival communities. It was suggested above that 
if two communities started side by side with equal natural 
advantages but with different habits of spending, we might get 
a test of the comparative merits of those habits. This may be 
used likewise as a means of testing, in imagination at any 
rate, the rational quality of a standard of living. That standard 
of living which would enable a community or nation to make 
the most rapid and permanent progress would have to be com- 
mended. Something depends, however, on our definition of 



RATIONAL CONSUMPTION 465 

progress. There may be about as many ideals of progress as 
there are people who have ideals. Without attempting a full 
and complete definition, it would seem fairly safe to suggest 
that among other things progress should include general 
improvement in comfort, well-being, and satisfaction. 

The whole life of the nation as well as of the individual to 
be considered. Whether this form of progress is worth what it 
costs or not is another question. The individual spendthrift 
doubtless thinks that his immediate satisfaction is more impor- 
tant than his future well-being or that of his descendants. He 
therefore endangers his future well-being for the sake of satis- 
faction in the present. To him progress is not worth the price. 
The price is present abstinence. He would probably not deny 
that saving and economy would make for progress, that is, 
would make him better off in the future. He would merely 
say that he did not care for progress so much as for present 
gratification. So with a spendthrift nation ; it might agree that 
accumulation of wealth and improvements in comfort and well- 
being would be characteristic of progress and that thrift and 
economy would contribute to that end, but it might decide that 
it did not care so much for progress as for present gratification. 
A nation feeling this way gets what it prefers. The future, 
however, probably belongs to those individuals and those nations 
which possess more of the time sense, — to those who are able 
to think of the whole of life as a unit rather than of every 
moment as sufficient unto itself. 

Leaving out of the discussion for the present the question 
as to whether prosperity is worth while or not, but assuming 
that it is worth while, the test which we have suggested would 
be a good one. What standard of living, if adopted and fol- 
lowed persistently, generation after generation, would increase 
the comfort and well-being of the community and develop the 
power to support increasing numbers of people and support 
them better, to add to the productive power of each generation, 
and ultimately to raise the economic, social, political, and even 



466 PRINCIPLES OF POLITICAL ECONOMY 

military strength of the nation to the maximum ? Granting 
that there are other factors in the problem, we still have the 
right to insist that the standard of living is one important 
factor. The standard of living which contributes most to prog- 
ress as we have defined it is therefore to be commended. That 
standard of living will contribute most in which the net con- 
tribution of the average person is the highest ; that is, where his 
production exceeds his consumption by the widest margin. 

Let us return to the formula V=P— C. That is the best 
standard of living which enlarges the value of the average 
person to the maximum. 

It must begin to appear that rational consumption is as 
important a factor in national prosperity as efficient production. 
The relation between consumption and production is even 
closer than we have yet shown it to be. In a most important 
sense useless consumption is a waste of labor, or of productive 
power. It requires labor, or productive power, to produce every- 
thing which we consume. If our consumption is such as to 
enable us to give back an equal amount of productive power, 
there is no waste ; but if we consume in excess of that which 
is necessary to maintain our working capacity at its maximum 
efficiency, the labor which produced the things which we con- 
sume in excess is wasted as truly as though it were badly 
directed or were working with crude and unsuitable tools. 

Liberal ideas as to what is necessary. It is well, however, 
to be rather liberal in our ideas as to what is necessary in 
order to maintain a man's working capacity at its maximum. 
Considerable recreation and relaxation are always recognized 
as necessary. The anticipated enjoyment, not only of games 
and other forms of recreation but of objects of comfort and 
delight, is a spur to energy. It is not only a spur to energy ; 
it is also a means of creating and preserving a joyful frame 
of mind, without which sustained effort is impossible,. and with- 
out which it is frequently asserted that no really fine work of 
any kind is ever done. 



RATIONAL CONSUMPTION 467 

Joy in work. Looking forward to a holiday or a vacation 
has sustained many a laborer through weeks and months of 
study and toil. The desire to possess a bicycle or an automo- 
bile has galvanized many an otherwise indolent boy into strenu- 
ous productivity. The pleasure of giving useless presents to 
their children at Christmas time has lightened the toil of many 
a father and mother through many a hard winter. In our at- 
tempts to define a rational standard of living we must not 
overlook a multitude of things which people want and want 
intensely without being able to give any good reason why they 
want them. Women can no more give a reason why they like 
babies and finery than a fox terrier can give a reason why he 
likes to chase cats. There is no more certain way of spoiling 
a boy than by compelling him to give a reason for everything 
which he wants and refusing to allow him to have it unless 
his reason is satisfactory to older people. It would be equally 
unwise to try the same plan with grown-ups. We must be 
rather careful, therefore, in defining a rational standard of liv- 
ing, not to eliminate many things which no one is able to give 
a very good reason for desiring, but which, nevertheless, are 
desired with an intensity which cannot always be expressed. 

Tools as consumers' goods. The world has undoubtedly lost 
much, in productive efficiency as well as in the joy of living, 
through its failure to appreciate the possibilities in the direction 
of turning tools and other producers' goods into consumers' 
goods. That one must have good tools to do good work has 
long been recognized, but we have scarcely begun to realize 
the full meaning of the term good tools. It is not only neces- 
sary that they be capable of doing their purely mechanical 
work ; it is also essential that they please the mind of the 
worker. They must be pleasing to look upon as well as 
agreeable to the hand. 

The purpose of a tool is to bridge the gap between the 
worker and the object upon which he is working, — to enable 
him to transfer to the object the idea or plan which he has in 



468 PRINCIPLES OF POLITICAL ECONOMY 

mind. It must therefore fit the mind of the worker as well 
as his hand and his arm. 

The importance of having tools which help to keep the 
worker in an agreeable frame of mind is not so much in the 
fact that he can do more or better work in a given minute or 
a given hour, though there is something in that. The chief 
importance lies in the fact that he can keep at it for more 
minutes, more hours, more days, and more years. Some rare 
geniuses are able to work regularly and all the time, '' taking 
infinite pains " and apparently never tiring. Most of us, how- 
ever, are desultory creatures who have to coax ourselves to 
work steadily. It is easier to coax ourselves to work properly 
if our tools are such as we delight to handle and our workshop 
is a place where we delight to be. 

Coaxing ourselves to work. The writer remembers a vener- 
able farmer who seemed to be the very embodiment of the 
spirit of work. The habits of a lifetime had got into his very 
bone and muscle. Work seemed to be his chief pleasure and 
idleness his chief pain. Yet he confided to the writer that he 
feared that he lacked the moral character which was necessary 
to set a gatepost properly. He knew that it bught to be set 
four feet deep, — that if it were set less deep than that, the 
gate would sooner or later begin to sag and give trouble. Yet, 
when he was actually digging the hole, he found his courage 
and his determination gradually weakening. When it was three 
feet deep it " looked deep enough," and unless he rallied all 
his moral force he would stop somewhat short of the neces- 
sary four feet. As another means of supporting his character 
and encouraging himself to do what he knew he ought to do, 
he never undertook to dig a post hole unless he had all his 
tools in the best possible shape. It was harder to persevere 
with poor tools than with good tools. A new tool in which one 
takes some pride is a great help in such times of moral strain. 

Aside from their effect upon the quantity and quality of the 
work which a person can do, handsome tools contribute their 



RATIONAL CONSUMPTION 469 

share to the sheer joy of Hving. Those people who are not 
obUged to work have the same need as others for pleasing 
effects. Not having any use for tools or other objects of utility, 
they take to collecting useless objects, somewhat after the 
fashion of the bower bird. That bird, it will be remembered, 
gathers bits of glass, colored string, broken china, bright 
pebbles, and spreads them before her nest, for no purpose, 
apparently, except the pleasure of looking at them. Now 
tools may be just as beautiful as the greater number of those 
useless objects which people of leisure and bower birds collect 
for their own delectation. Those who work spend a large por- 
tion of their time with their tools and in their shops, more than 
they are likely to spend anywhere else except in their own 
homes. Next to the adornment of their homes, the adornment 
and beautification of their working places must furnish them 
the pleasure of living. 

Pride in work. The spirit which regards work as a more or 
less repulsive necessity — which tries to cover up in many ways 
the evidences of work — is probably responsible for a large part 
of the neglect which we have shown to our working places. 
Naturally enough a person who regards work merely as a dis- 
agreeable necessity — something to be ashamed of and avoided 
on every possible pretext — is not likely to spend very much 
money on the polishing or adornment of his tools or the beauti- 
fication of his working place. 

No rural neighborhood, for example, is quite so desolate as 
those from which people retire as soon as they have accumu- 
lated enough to enable them to live in town. Farmers who re- 
tire as soon as they possibly can afford to do so are not likely 
to spend much money in adorning their farmhouses or in 
making the neighborhood attractive. It is only where you find 
farmers who are glad that they are farmers, — who expect to 
remain farmers and whose children look forward to the same 
career, — that you find the farms, the homes, and the community 
adorned and embellished with the evidences of civilization. 



4/0 PRINCIPLES OF POLITICAL ECONOMY 

No town or section of a town is generally quite so unattractive 
as the place where the people work. It has not occurred to 
many of the owners of these working places that the people 
really live there a good portion of their lives, and that if they 
cannot get a part of their joy of living there, they will miss a 
good deal of it. No doubt this is partly due to the fact that 
the owners themselves live elsewhere. In this respect a factory 
district resembles a farming district whose land is owned by 
absentee landlords. The surplus which the land affords is all 
spent somewhere else, — where the owner lives, — in adorning 
and embellishing his home ; there is none left to adorn and 
embellish the countryside. Similarly, the surplus which the 
factory yields is spent somewhere else, usually as far from the 
factory as the owner and his family can get. 

If it were not for the fact, referred to above, that we have 
inherited certain aristocratic traditions (or else that we try to 
ape those who have) and are rather anxious to get away from 
the sources of our incomes, we might find it possible, in some 
cases at least, to live near our places of business. If we all did 
so, we should spend our money there and should also, if we 
could afford it, beautify those surroundings as we now beautify 
the suburban districts where we live. 

It is astonishing how much of the fashion of the world is 
due to the desire to avoid the appearance of having to work, or 
even to advertise the fact that one does not have to work. In 
old times certain Chinese magnates used to allow the finger- 
nails to grow to extraordinary lengths as a visible sign that 
they did not have to work. The binding of the feet of the 
girls is said to have had the same origin. The train, which 
only lately was a fashionable necessity for every lady in 
Christendom, answered much the same purpose. 

Seeing that we have been so anxious either to avoid work 
or at least to avoid the appearance of having to work, it is not 
strange that we have done very little to make our work agree- 
able. The opposite tendency shows itself once in a while, 



RATIONAL CONSUMPTION 471 

however, as in the case of those New England shoemakers of 
an earher day who cooperated to hire readers to read to them 
while they plied their trade. Such people cannot be kept 
down. They built up a great shoemaking industry in New 
England. One finds good workmen who delight in nice tools, — 
tools with which it is a pleasure to work, — and who, if they 
have an opportunity, adorn their shops with flowers. A good 
farmer usually likes to work with a handsome team, well 
groomed and harnessed. The team is to him both a consumers' 
good and a producers' good. There is not much doubt that such 
a farmer works more cheerfully and more steadily, and that he 
finds life more enjoyable, than he would if he tried to get along 
with an ill-matched, unattractive team. It is reasonable to sup- 
pose that we should all do better and more persistent work, 
and get more enjoyment out of life, if we took some pains to 
make the conditions of our work attractive. If this is so, it is 
a matter of great economic importance and one which will con- 
tribute to the prosperity, strength, and greatness of the nation, 
and even more to the enjoyment of the people. Expenditure 
for such things would form a part of a rational system of con- 
sumption. But it is important that all such enjoyable consump- 
tion should be regarded in its true relation to the problems of 
the national life upon which our individual lives depend in the 
long run. To forget their relation to the joy of work and to 
think of them as ends in themselves, unrelated to the larger 
problems of life, is to diminish our own value to the nation and, 
to that extent at least, endanger the position of our posterity. 



CHAPTER XL 
LUXURY 

Different classes of consumers* goods. Consumers' goods 
have been divided into four classes, according to the kind of 
desires which they are designed to satisfy. They are neces- 
saries, comforts, decencies, and luxuries. This, however, is at 
best only a rough classification. It may seem fairly easy to 
distinguish between necessaries and comforts, and there are 
doubtless many cases where goods are easily classified ; but 
there are also many line cases where it is difficult to determine 
whether the good in question is a necessary or a comfort, or 
even a decency. Another difficulty which tends to obscure the 
distinction is found in the fact that no one, however poor, con- 
fines himself to necessaries. Part of his expenditure will go 
for comforts, part for decencies, and part even for luxuries. 
Again, no one, however rich, can avoid the buying of neces- 
saries and comforts. 

Necessaries. In a general way we may define necessaries as 
all goods which are required for the maintenance of physical 
health and strength, not only of the mature man but also of 
his family and even of his young children. In discussing what 
used to be called the iron law of wages, it was said that the 
natural wages of labor are made up of those things which are 
necessary in order that the laborer may maintain his health and 
strength and reproduce his kind, so as to maintain the supply 
of labor without increase or diminution. Aside from the un- 
warranted use of the word natural as applied to this rate of 
wages, it would be impossible to say that such wages would 
consist entirely of necessaries. It is quite possible that the 
laborers might demand luxuries and forego the gratification of 

472 



LUXURY 473 

their domestic instinct unless they could get them. In that 
case wages would have to be high enough to provide the 
laborers with these luxuries ; otherwise they would not marry and 
reproduce their kind with sufficient rapidity to keep the supply 
of labor intact. It would, in that state of society, be necessary to 
pay such wages as these ; but it could hardly be said that every- 
thing which these well-to-do laborers consumed could be classi- 
fied as necessaries of life. In short, wages which will enable 
the laborer to enjoy comforts, decencies, and luxuries, as well 
as necessaries, may have to be paid in order to keep up the 
supply of labor. 

Comforts. Of these three classes of goods, comforts are the 
most difficult to define. While not absolutely necessary for 
the maintenance of health and strength, still they can hardly 
be dispensed with in any society where life is really worth 
living. A young and vigorous person might, by running to and 
from his work in cold weather, dispense with an overcoat. 
From his point of view an overcoat could hardly be called a 
necessary, and yet it would be a great comfort. Cushions or 
upholstered furniture, spring mattresses, etc. can hardly be 
called absolute necessaries, and yet they would be considered 
almost indispensable by the average family. 
I Decencies. The dividing line between comforts and decencies 
lis likewise obscure. By decencies we mean those articles of 
'consumption which the habits or customs of one's neighbor- 
, hood or one's class prescribe, and without which the individual 
I or the family would feel that it could scarcely maintain its 
position of respectability. In a community where military tradi- 
tions are strong and society tends to be stratified, a military 
officer could almost lose caste if he condescended to ride on 
a street car. In such a community a private carriage would 
seem almost to be a necessary, though according to our defini- 
tion we should call it a. decency. Anything which an indi- 
vidual member of any class, occupation, or profession would 
feel ashamed to be without would come under our definition. 



474 PRINCIPLES OF POLITICAL ECONOMY 

Adam Smith ^ included both decencies and comforts under nec- 
essaries and gives a very clear description of the difference, as 
it appeared to him in his day, between necessaries and luxuries. 

By necessaries I understand, not only the commodities which are indis- 
pensably necessary for the support of life, but whatever the custom of the 
country renders it indecent for creditable people, even of the lowest order, 
to be without. A linen shirt, for example, is, strictly speaking, not a neces- 
sary of life. The Greeks and Romans lived, I suppose, very comfortably, 
though they had no linen. But in the present times, through the greater 
part of Europe, a creditable day-labourer would be ashamed to appear in 
public without a linen shirt, the want of which would be supposed to denote 
that disgraceful degree of poverty which, it is presumed, nobody can well 
fall into without extreme bad conduct. Custom, in the same manner, has 
rendered leather shoes a necessary of life in England. The poorest credit- 
able person of either sex would be ashamed to appear in public without 
them. In Scotland, custom has rendered them a necessary of life to the 
lowest order of men, but not to the same order of women, who may, with- 
out any discredit, walk about bare-footed. Under necessaries, therefore, I 
comprehend, not only those things which nature, but those things which the 
established rules of decency have rendered necessary to the lowest rank of 
people. All other things I call luxuries, without meaning by this appellation 
to throw the smallest degree of reproach upon the temperate use of them. 
Beer and ale, for example, in Great Britain, and wine, even in the wine 
countries, I call luxuries. A man of any rank may, without any reproach, 
abstain totally from tasting such liquors. Nature does not render them 
necessary for the support of life ; and custom nowhere renders it indecent 
to live without them. 

Marshall 2 divides consumers' goods into necessaries, comforts, 
and luxuries, making no special class to be called decencies. 

This brings us to consider the term necessaries. It is common to divide 
wealth into necessaries, comforts, and luxuries ; the first class including all 
things required to meet wants which must be satisfied, while the latter con- 
sist of things that meet wants of a less urgent character. But here again 
there is a troublesome ambiguity. When we say that a want must be satis- 
fied, what are the consequences which we have in view if it is not satisfied.? 



1 The V^ealth of Nations, pp. 466-467. The Clarendon Press, Oxford, 1880. 

2 Alfred Marshall, Principles of Economics, pp. 67-69. Macmillan and Co., 
London, 5th ed., 1907. 






I LUXURY 475 

I Do they include death ? Or do they extend only to the loss of strength and 
■ vigour ? In other words, are necessaries the things which are necessary for 
life or those which are necessary for efficiency ? . . . 

I It may be true that the wages of any industrial class might have sufficed 

f to maintain a higher efficiency, if they had been spent with perfect wisdom. 

But every estimate of necessaries must be relative to a given place and 

, time ; and unless there be a special interpretation clause to the contrary, 

j it may be assumed that the wages will be spent with just that amount of 

wisdom, forethought, and unselfishness which prevails in fact among the 

industrial class under discussion. With this understanding we may say that 

the income of any class in the ranks of industry is below its necessary level, 

when any increase in their income would in the course of time produce a 

more than proportionate increase in their efficiency. Consumption may be 

economized by a change of habits, but any stinting of necessaries is wasteful. 

Luxuries. Where comforts or even luxuries have entered 
into the laborer's standard of living, it would undoubtedly be 
true, as Marshall suggests, that any forcible reduction of wages 
would result in less efficiency on the part of the laborers. 
From the standpoint of either the lawmaker or the employer, 
therefore, all those things which the customs of the time and 
country give to the laborer must be considered as necessaries. 
To cut down a portion of the laborer's wages would not result 
in the mere cutting out of a few luxuries from his consump- 
tion. He would be quite as likely to cut down his consumption 
of physical necessaries as of those things which, from an abso- 
lute point of view, could be called decencies or luxuries. It 
is a well-known fact that high-spirited people, with social 
standards and traditions to maintain, will, if they find them- 
selves in reduced circumstances, deprive themselves of absolute 
physical necessaries of life in order to keep up appearances. 
This, of course, is certain to reduce their efficiency. 

While this is a final consideration so far as the employer or 
the lawmaker is concerned, it does not alter the fact that if 
these people could be appealed to on moral or other grounds 
to rationalize their habits of consumption, they would be much 
better off. If they would reduce their consumption of luxuries 



476 PRINCIPLES OF POLITICAL ECONOMY 

and increase their consumption of the necessaries of life, not 
only their working efficiency but their general economic well- 
being would be improved. '' Wherefore will ye spend your 
money for that which is not bread " ? demanded the prophet. 
He was making his appeal, however, directly to the individual 
and not proposing any control of consumption by law. 

Luxuries have very much the same meaning to-day as that 
which Adam Smith gave to them. They are articles of con- 
sumption which are not demanded either by the physical health 
and strength of the people or by the rules of society, but are 
wholly matters of individual indulgence. The dividing line, 
however, between decencies and luxuries is still very obscure. 
If a person belongs to a small group of spendthrifts, it may 
be claimed that the rules of his social group compel him to 
spend money lavishly on things which others would regard 
as pure luxuries. He may therefore claim that these are only 
decencies, because they are prescribed by the rules of his 
group or class. Instead of accepting the verdict of any special 
class or set, it would seem better to confine our idea of 
decencies to those things which are prescribed by the almost 
universal consensus of opinion of the time and place. Thus, 
in America, for example, it would be almost universally 
thought to be indecent for men and women to appear in 
public places, even in warm weather, without shoes, though 
there are certain isolated communities where this rule would 
not prevail. Before the advent of the waist shirt it was gen- 
erally regarded as improper for a man to appear at any 
public place, especially indoors, without a coat. That every 
woman shall possess certain articles of finery is a rule even 
among the poorest of people. It will be better, therefore, if 
we restrict the definition of decencies to those things which 
society in general, rather than some special clique or coterie, 
prescribes as necessary. 

Stimulating effect of luxury. Economists have been some- 
what divided on the question as to whether a luxury is always 



LUXURY 477 

to be condemned or not. McCulIoch^ states that any grati- 
fication, however trivial, is necessary if an individual is stimu- 
lated to work in order to attain it. John Stuart Mill ^ says, 
r* To civilize a savage, he must be inspired with new wants 
and desires, even if not of a very elevated kind, provided 
ithat their gratification can be a motive to steady and regu- 
lar bodily and mental exertion." It is a well-known fact that 
in certain low states of civilization the laborer or the peon 
is content with so few articles of consumption that he will 
not work efficiently or steadily. If, by working three days 
in a week, he can earn wages enough to support him, in 
the style to which he is accustomed, for seven days, he will 
i work only three days in the week. It has been generally 
i recognized that the only cure for this difficulty is to raise 
j his standard of living and increase his wants, so that he 
will have a motive for regular and steady work. Many inter- 
I esting stories are told of the devices by means of which the 
I laborer is induced to work or by which his wife is induced 
to demand more wages of him in order that she may provide 
herself with finery. 

We need not go to backward countries, however, to find 
examples which illustrate precisely the same principle. There 
are men among us who reduce the number of working hours 
per day for much the same reason. Finding that they can earn 
enough in four hours to support them for twenty-four, they 
choose to work only four hours a day ; that is, they go to their 
offices at about ten o'clock in the morning and stay until about 
two, and spend the rest of the day at the club or the golf course. 
There are still others who find that they can earn enough in 
twenty years to support them for the whole of their lives. 
They therefore retire from business long before their physical 
and mental capacity has begun to decline, and spend the rest 
of their time in pleasant pursuits. 

1 J. R. McCulloch, The Principles of Political Economy. Edinburgh, 1825, 

2 Principles of Political Economy, Bk. I, Chapter VII, § 3. 



4/8 PRINCIPLES OF POLITICAL ECONOMY 

Economically speaking, however, all these men, from the 
peon up, are merely choosing between different kinds of luxury. 
To the peon, leisure, sport, amusement, and even rest are lux- 
uries in which he delights. If his desire for this sort of luxury 
is stronger than his desire for other kinds, he will choose this 
kind. The same is true of the man who cuts down his work- 
ing day or his working years. To him, leisure, sport, and 
rest are luxuries. If he cares more for these than for such 
additional luxuries of other kinds as he could secure by working 
longer, he will of course choose these. 

Material and immaterial luxuries. It is true that by choos- 
ing material luxuries rather than the immaterial satisfaction 
of leisure and rest the quantity of material goods which are 
produced and put on the market is increased. The statistics 
of wealth are expanded. The census taker and the tax assessor 
find more tangible articles of wealth in such a community than 
they would find in the community which preferred to take its 
luxuries in the form of leisure. Doubtless all of us who are 
members of a strenuous race, to whom leisure does not seem 
so very desirable, and also of a race which might be malignly 
characterized as a greedy or a gluttonous race, having powerful 
desires for material luxuries, think that we have made much 
the better choice. We are therefore much inclined to despise 
the race which chooses otherwise. There is such a thing as 
a pot calling a kettle black. 

A storehouse of labor. There is another argument, however, 
which goes back at least as far as David Hume, to the effect 
that luxuries must be regarded as a storehouse qf labor which 
in the exigencies of the state may be turned to the public 
service. This may mean merely that a community which is 
expending a large proportion of its energy in the production of 
luxuries may, in times of great crisis, turn that surplus energy 
into the work of meeting the crisis. In time of war, for in- 
stance, the consumption of luxuries may be cut down, and the 
productive energy, which had been used in the production of 



LUXURY 479 

luxuries, may now be used in the prosecution of the war or 
in the manufacture of munitions and war equipment. This is 
undoubtedly a sound argument so far as it goes. 

In order to put several million men of working age into the 
army and navy, and more millions into the munition factories 
and navy yards, and others into the mines to produce the raw 
materials, and still others onto the farms in order to increase 
the food production, it is absolutely certain that labor must be 
withdrawn from some other industries. It is fairly obvious that 
there are only two sources from which they can be drawn. 
They who are not working may be put to work, and those who 
are doing unnecessary kinds of work may be put into the 
necessary industries. There is no other possibility. The nation 
must therefore look about and see what can be done in these 
two directions. 

Most of our men of working age are now at work doing 
something which is necessary, convenient, or pleasing. A good 
many women are virtually idle, though they all probably man- 
age to keep busy at something or other. Some of them may 
work in munition factories or take places in the ordinary fac- 
tories, shops, and stores, displacing men and women already 
employed. Those who are displaced may then enlist or go into 
munition factories. A much better opportunity is offered in 
their own homes. Every woman who keeps one or more serv- 
ants, and who is able to do anything either inside or outside 
the home, may do her own housework and discharge her serv- 
ants. They will then be available for the industries whose 
expansion is made necessary by the war. Those who are 
situated where they can have a sizable garden may work ad- 
vantageously at gardening, but they should take it seriously 
and not waste their time on a few struggling garden plants. 
They should do an appreciable fraction of what is known as 
a man's work. 

Reducing consumption in times of national crisis. A much 
greater opportunity lies in the closing or cutting down of all 



48o PRINCIPLES OF POLITICAL ECONOMY j 

unnecessary industries and occupations. If every luxury- 
producing industry were closed down, a vast quantity of labor 
would be released. It would then be available either for mili- 
tary purposes or for the production of the necessaries of life. 
Our golf courses, baseball fields, and tennis courts could be 
transformed into farms and gardens. This would add a good 
many acres to the productive land, and, what is vastly more 
important, the players as well as the spectators could be used in 
productive work. These suggestions are enough to indicate that 
considerable changes in the daily habits of the people may be 
necessary if a great national crisis is to be met. 

These changes in habits may profitably go much farther. 
The people may economize greatly in their consumption. It 
is amusing to hear some people talk about the waste in Ameri- 
can life. You would think that the great American garbage 
pail was a veritable gold mine if it could only be profitably 
worked. Doubtless there is some waste there, and it will bear 
looking into ; but if we would consume more food and fewer 
condiments, relishes, and delicacies, whose real function is to 
make the food palatable, we should reduce the cost of food 
about one half. Starch, in the form of grain, potatoes, or 
coarse vegetables, is our principal food. To this must be added 
a very moderate amount of protein, fats, and sugar. These, 
however, may also be made to serve the purpose of making the 
basic starchy food more palatable. F'ruits and the finer vegetables 
and salads should be made to serve mainly as relishes. Instead, 
many of us make our meals principally of things which should 
serve as condiments, relishes, and delicacies, using starchy food 
only as a means of diluting them. It is this habit, rather than 
our garbage pails, with which the French people, who are so 
much wiser in matters of food than we are, find most fault. As 
to clothing, if the people patch and darn it and make it last 
longer, the textile and clothing trades will then have time to 
produce army supplies. Without such changes of habits as 
these, let it be remembered, it will be impossible to recruit 



LUXURY 481 

an army and navy and at the same time increase the produc- 
tion of suppHes for the army and navy as well as of all the 
basic necessaries of life. 

There are, however, two ways in which these changes may 
be forced upon the people, whether they will or no. If they 
insist on consuming wastefully and spending their money for 
things which are not necessary, while men are being at the 
same time taken out of productive industry, this unbalancing 
of supply and demand will send prices so high that most of the 
people, particularly the poor people, will not be able to buy 
anything but the barest necessaries. The well-to-do owe it as 
a duty, therefore, to reduce their consumption and thereby re- 
duce the demand upon the undermanned industries. Again, 
if the government is wise enough, it will put such high taxes 
upon all incomes as to compel the people to reduce their con- 
sumption and their purchases. In this case, instead of buying 
supplies and hiring men with their money, the people will turn 
it over to the government, which will then buy supplies and 
hire men with it. If the taxes are high enough, women will 
be compelled to do their own housework and discharge their 
servants, men will be compelled to close their golf courses and 
stop going to ball games, and everybody will be compelled 
to buy cheaper and more nutritious food and to wear their 
old clothes longer. But they ought to do all these things and 
a multitude of others anyway, in a time when the strength of 
the nation is being put to the test and its very life is at stake. 

The slogan '' business as usual " in time of a great war is 
the result of crass ignorance of some of the basic facts of eco- 
nomic life. It is sometimes asserted in support of that slogan 
that the only reason why the people are well-to-do is that they 
have been spending their money for the products of industry. 
Therefore, if the people quit spending their money, production 
will be cut off and prosperity destroyed. But a little intelligent 
analysis will show that it is not proposed to spend any less 
money in time of war, or to hire any less labor, than in time 



482 PRINCIPLES OF POLITICAL ECONOMY 

of peace. The obvious thing is that the energy of the people 
must be completely redirected. The great purpose of most 
people in time of peace is to gratify their desires. In time of 
war the great purpose must be to win the war. The energies 
which have been devoted to the work of producing objects of 
gratification must now be turned to the work of beating the 
enemy. If everyone insisted on having as many objects of desire 
and gratification in time of war as in time of peace, it would 
take just as many men to produce these objects of desire and 
gratification, and there would be none to spare for defending 
the country. Instead of spending their money directly for their 
own private purposes, the obvious duty of the people is to turn 
over as much of it as they can possibly spare, and let the 
government spend it in purchasing war supplies and in paying 
men to do the few things which are supremely needful for the 
national defense. 

Rapid recovery after a local disaster. Even in cases of 
great local disaster, such as a great fire or earthquake, it has 
been remarked many times that recovery comes with amazing 
rapidity. In spite of the fact that vast quantities of wealth 
are destroyed, the city soon recovers and becomes apparently 
as prosperous as ever. Luxury is supposed by some to have 
an important bearing on this question. The energy which, 
before the disaster, was spent in producing luxuries is now 
available to be spent in rebuilding what was destroyed. In order 
to do this, however, the people must, for a time at any rate, 
reduce their consumption of luxuries. The individual whose 
property has been destroyed is to that extent poorer than he 
was before. He may borrow capital with which to rebuild, but 
until the debt is paid off, his effective income is considerably 
reduced. He therefore has less money to spend on articles of 
luxury ; he is virtually spending that money on a new building. 

The objection may be raised that the luxury which takes 
the form of leisure would also furnish a fund of energy for 
the meeting of a great national crisis or repairing a local 



LUXURY 483 

disaster. Men who have remained idle, enjoying leisure, may 
now go to work to carry on the war or to rebuild the city 
which has been partially destroyed. This objection is some- 
what weak, however, because, in the first place, habits of sloth 
and idleness are much more difficult to overcome than habits 
of lavish consumption. The sheer inertia of the people makes 
it almost impossible to rouse them to extra exertions in time 
of crisis, whereas the people who have been exerting them- 
selves strenuously in the production of articles of luxury may, 
with less difficulty, redirect their strenuous energy. In a sense 
the productive machinery of the community is already going. 
It can be kept going and its direction changed more easily 
than it can be started up. 

In the second place, when a community takes its luxury in 
the form of idleness, it is certain to be ill equipped with the 
machinery of production as well as with the technical knowl- 
edge and skill which are necessary to efficient production. 
If they lack machinery and technical knowledge and skill, 
they will not be able to carry on a modern war successfully 
or to repair a local disaster; whereas a community that takes 
its luxury in the form of material goods will have learned in 
the process of production much technical skill, and will have 
accumulated vast funds of machinery and tools. If there is 
anything that modern warfare has taught, it is the superiority 
in war of the nation that is thus equipped. The technical 
skill and the machinery which are accumulated for purposes 
of production may easily be turned to the purposes of destruc- 
tion, and in war the community that is best equipped for the 
work of destruction will win. 

Reducing the rate of permanent construction. So far the 
argument seems conclusive in favor of material luxury as 
against immaterial luxury in the form of leisure and idleness. 
We are far, however, from a complete justification of luxury 
in the ordinary sense. The community that is in the habit of 
investing its money for the future rather than of buying objects 



484 PRINCIPLES OF POLITICAL ECONOMY 

of immediate gratification will likewise have a fund of surplus 
energy at its disposal. All the energy which has been devoted 
to permanent construction for the future good of society may, 
in time of great national crisis or local disaster, be redirected 
toward meeting the crisis or repairing the local damage. The 
kind of skill which is necessary to permanent construction is 
of quite as high an order as the kind which is necessary to 
the production of ephemeral articles of consumption. All the 
advantages, in short, which a luxurious community possesses 
for the meeting of a great crisis are also possessed by the 
thrifty community which spends a good portion of its income 
in durable construction and in building for future generations. 
In the long run the community that spends a large portion of 
its energy in permanent construction will have certain advan- 
tages over the community that consumes luxuriously. If every 
farmer, for example, should put back into his farm a part of 
his annual income, in the way of improvement of the soil, in 
ditching, draining, fencing, and building, he would be using 
up surplus energy just as truly as he would be if he spent that 
amount of money in luxurious consumption. In time of national 
crisis he can suspend, for the time, further building and im- 
provements on his farm and have energy to spare for the 
production of more food ; or he can dispense with a certain 
amount of hired help, which will then be available for govern- 
ment purposes. After a few generations the nation whose 
farmers systematically put back into their farms a part of their 
incomes will have much better farms and much greater pro- 
ductive power than the community which merely keeps its 
agricultural wealth intact and spends the surplus in luxurious 
consumption. 

That which applies to farms applies also to factories, shops, 
and all other productive establishments. The community which 
is in the habit of adding to its accumulated wealth in each gen- 
eration by investing a part of its income in tools and instruments 
for future production will, after the lapse of a few generations. 



LUXURY 485 

be vastly stronger than the community which merely keeps its 
productive power intact and consumes all its income. Thus 
we reach the conclusion that, although the luxurious consumption 
of material articles may be very much better than the luxurious 
enjoyment of leisure, nevertheless thrift, forethought, and the 
investment of incomes in instruments for future production is 
better still. He who does less well than he can, does ill. 
Therefore he who consumes luxuriously when he might invest 
productively is doing badly. 



CHAPTER XLI 

/THE CONTROL OF CONSUMPTION 

^'' / 
Sumptuary laws. Luxurious ^consumption can undoubtedly 

be condemned on economic grounds as being less desirable 
than frugality, forethought, and the investment of funds in 
productive industries and objects of durable satisfaction. Never- 
theless it does not follow of necessity that the government 
should, through sumptuary laws, attempt to repress luxury. 
To prohibit the consumption of articles of luxury might very 
easily take away the motive to industry. If the people cannot 
have expensive commodities, they may take their luxury in the 
form of leisure, idleness, and self-amusement. This, as we saw 
in the last chapter, is even less desirable than luxurious con- 
sumption. If we grant the argument used by Mill and others, 
to the effect that an increase of wants sometimes has the effect 
of overcoming the tendency to sloth and idleness, it would 
follow that if the government should make it impossible for 
men to gratify these increased wants, it would merely drive 
the people back into sloth and idleness. This could only be 
counteracted by other laws compelling them to work, which 
would be a kind of slavery. 

Legislative control not always effective. One of the last 
things that we learn regarding legislation is that it usually 
takes a large number of new legislative acts to correct or 
counteract the unlooked-for results of any legislative act. 

Another objection to legislative attempts to suppress luxu- 
rious consumption is the one pointed out by Adam Smith and 
others, to the effect that when their habits of life are fixed, men 
and women will frequently give up the necessaries of life be- 
fore they will give up luxuries. This applies especially to the 

486 



THE CONTROL OF CONSUMPTION 487 

attempts to make luxuries expensive by taxing them. When 
they become very expensive, some people will insist on having 
them, even if it takes their whole income to buy them and 
leaves them nothing for the necessaries of life. 

These arguments, it will be noticed, are based upon the in- 
efficiency of sumptuary laws rather than upon any more funda- 
mental objection to them. In general they seem to produce 
results which are worse than the thing they try to cure. Noth- 
ing whatever can be said, however, against a voluntary foregoing 
of luxuries and a rationalizing of standards of living on the 
part of the people themselves. It is one thing for the people 
to want the right things ; it is quite a different thing to try to 
force them to consume the right things whether they want 
them or not. It is one thing for the people voluntarily to give 
up luxuries ; it is quite a different thing to compel them by 
law to do so, whether they are willing or not. 

Control of vice is " sumptuary legislation.** In some 
extreme cases, however, a luxury becomes so extremely demor- 
alizing and dangerous to society as to justify government regu- 
lation or suppression. There may be undesirable results of such 
legislation, — there are pretty sure to be ; but if these undesir- 
able results are less undesirable than the thing which is sup- 
pressed, there is a net gain. Regulation or suppression of vice 
of all kinds is a kind of sumptuary legislation. If the vicious 
habit or the vicious form of consumption is sufficiently injurious, 
its suppression is justifiable, even though some undesirable 
results may follow its suppression. 

There are, however, a good many sentimental objections to 
sumptuary laws which have no connection with the real objec- 
tions. We are all consumers, and if the government begins 
regulating consumption, we are each of us likely to come in for 
a certain amount of regulation. We are rather impatient of all 
kinds of regulation when it is applied to ourselves, though we 
may be very patient of the regulation of other people, as we are 
patient in the contemplation of other people's troubles. We 



488 PRINCIPLES OF POLITICAL ECONOMY 

are not all of us in the banking or the railroad business, and 
do not feel in danger when the government undertakes to 
regulate those and other special lines of business. 

No essential difference between controlling business and con- 
trolling consumption. This consideration has led to quasi- 
serious attempts to draw a sharp distinction between the regu- 
lation or control of business and the regulation or control of 
consumption. But all such distinctions are trivial. Habits 
of consumption, as stated above, are quite as important to the 
welfare of the nation as methods of doing business. To at- 
tempt to regulate or control either is certain to produce 
undesirable results. Nevertheless, where the evils, either of 
unregulated consumption or of unregulated business, are great 
enough, we must have regulation and take our chances with 
the evils and difficulties of regulation. When we forget our 
own personal interests and begin to think in terms of the pros- 
perity, power, and greatness of the nation, all our sentimental 
objection to either form of regulation will disappear, and we 
shall begin to weigh the evils of lack of regulation against the 
evils of regulation. Whenever the balance turns in favor of 
regulation, we shall be ready for it. 

The national rather than the personal point of view. If 
one will look around and see what is going on, one will dis- 
cover that the people who think in terms of nationality rather 
than in terms of self-gratification are just as prone to legislate 
on matters of consumption as on matters of business. It is 
only those who think in terms of their own interest who are 
likely to make any distinction. Again, regulation, control, or 
suppression of the consumption of alcohol is one of the most 
widespread and democratic movements of the world to-day. 
Very few of those who favor this kind of legislation — gener- 
ally none of those who lead in the movement — have anything 
personal to gain by it. Most of them do not use alcohol and 
it does them very little direct harm. The suppression of liquor is 
favored in this country mainly by those who have been here long 



I 



THE CONTROL OF CONSUMPTION 489 

enough to develop a sense of nationality. It is opposed mainly 
by those who have not been here long enough to develop an in- 
terest in the future prosperity, power, and greatness of the nation. 

Whenever a nation is facing a great crisis in its history, 
when its strength and endurance are being put to a severe test, 
when, in short, it is fighting for its life as a nation, the people 
are forced to think in terms of national life rather than in 
terms of individual life. At such times the people find it just 
as necessary that the government shall regulate consumption as 
that it shall regulate production. They also find that freedom 
of speech is not more sacred or inviolable than freedom of run- 
ning a business. Military necessity always inaugurates a regime 
of regulation and compulsion. War is compulsory business from 
beginning to end. When a nation enters upon a great war, it 
passes instantly from the realm of gold to the realm of iron, 
— from a realm in which a price list is followed and voluntary 
agreement is the general rule to a realm in which authority is 
obeyed and compulsion is the general rule. Compulsion is 
likely to apply in all fields of activity, not simply in the field 
of production and business management, of transportation and 
food distribution, but also in the field of consumption and even 
in the field of selling talk for a profit. 

Selling talk for a price. Those who make their living by 
talking and writing are frequently unable to see any reason 
why their business should be regulated by the government. 
These are the people who are likely to be the strongest advo- 
cates of "freedom of speech" and ''freedom of the press" 
and, in general, of a laissez-faire policy with respect to their 
own business. As consumers are likely to object to the regula- 
tion of consumption, and business men to the regulation of 
business, so the talkers and writers are likely to object to the 
regulation of talking and writing. Nevertheless, those who think 
in terms of the national interest are not likely to be influenced 
by these distinctions. The censorship of the press, the control 
of consumption, and the regulation of business may all be equally 



490 PRINCIPLES OF POLITICAL ECONOMY 

justifiable at such a time. Instead of trying to find reasons 
why their own business should receive such consideration from 
the government, it would be a profitable exercise for all of us 
to ponder a little more upon a certain text regarding those who 
are more anxious to extract motes from their brothers' eyes 
than beams from their own. 

Vice as a selective agent. One of the strongest arguments 
against the public regulation of vice or injurious forms of con- 
sumption is that vice acts as a fool-killer and helps to rid the 
world of those undesirable persons who are unable to withstand 
temptation. There is some merit in this argument, and if the 
fool-killer worked with more accuracy than it seems to do, so 
that no one but the guilty individual ever suffered from his 
guilt, the argument in its favor would be very strong. Unfortu- 
nately there are not many cases in which the vicious individual 
injures no one but himself. He is quite as likely to injure 
others as to injure himself. If it were true that the individual 
who succumbs to vice never injured anybody else but himself, 
it might be argued with a good deal of reason that the best 
way to get rid of him would be to allow him to destroy him- 
self as rapidly as possible, — that by so doing we should in the 
course of time build up a strong race of people, who could live 
in the presence of temptation without injury. In a certain 
primitive state of society, where there was little interdepend- 
ence of parts, all this might be true. In a highly complex 
society, such as that with which we are acquainted, it is not 
true. The individual who succumbs to vice is a menace to the 
whole community. The danger is not confined to the innocent 
members of his own family, who of course are frequently re- 
duced to want and humiliation through no fault of their own. 

We must keep certain large and tangible facts always before 
us when we are considering questions of this kind. The chauf- 
feur who destroys his dependableness through his own vice 
may occasionally injure himself, but he is rather more likely 
to injure other people. The locomotive engineer who becomes 



THE CONTROL OF CONSUMPTION 491 

incapacitated through any kind of vice or bad habit may occa- 
sionally destroy himself, but he usually destroys a number of 
others in the process. The motorman, the train dispatcher, 
the surgeon, the drug clerk, and a multitude of others who are 
in responsible positions imperil others quite as much as them- 
selves if they ever become irresponsible and undependable 
through drunkenness or any other vice. 

Any vice which acts so swiftly and so injuriously must seri- 
ously endanger the rest of society and must obviously call for 
public regulation. This applies not simply to the extremely 
injurious forms of consumption known as vice, but to any kind 
of injurious or irrational consumption, such as luxury. In a 
time of national crisis, when every ounce of productive energy 
is needed to meet the situation, he who consumes luxuriously 
is causing the waste of productive energy and is thus interfer- 
ing with the success of the nation. In time of war, when 
armies and navies must be raised, ships and munitions manu- 
factured on a vast scale, and food and clothing produced more 
abundantly than ever, the question is always one of economizing 
productive power. To use up any of this productive power 
needlessly in the production of luxuries is to take it out of the 
nation's industries and even to threaten national disaster. In 
such times the injury which follows from luxurious consump- 
tion is so desperate as to justify public regulation. Even 
though some injurious results may follow from this regulation, 
these can scarcely be any greater than those which follow the 
unregulated consumption of luxuries. 

In normal times the danger from luxurious consumption is 
not so acute, and the need for regulation is therefore not so 
great. In this case we may have to consider whether luxuri- 
ous consumption is more injurious than the efforts to regulate 
it. This consideration, however, applies to all other forms of 
regulation and control. There is involved here a question of 
balance of profit and loss. It is highly important that on 
all questions of regulation we balance the accounts carefully. 



492 PRINCIPLES OF POLITICAL ECONOMY 

There is some cost in the mere extension of government con- 
trol and multipHcation of government offices. This diverts 
men from productive industry into government jobs. Unless 
they can save more to the country through their efforts as 
government officials than they could produce if they were left 
in productive industry, the loss is greater than the profit. 
Again, if through too much regulation legitimate industries 
are discouraged to a degree that more than offsets any saving 
which comes from regulation, there is always a net loss. In the 
case of mild luxuries which work no very serious injury to 
anybody, the general rule has been not to waste any energy 
by multiplying government offices in order to suppress them. 
But in times of national crisis the policy with respect even to 
mild luxuries may have to be changed. In normal times as 
well as in times of crisis the injury from certain extreme forms 
of luxury may be so great as to justify permanent control, 
regulation, or suppression. 

Luxurious consumption does not increase the demand for 
labor. There can be no doubt, however, that luxurious con- 
sumption is in itself an injury to the public, and particularly 
to the laboring classes, however inexpedient it might be for 
the government to use its power of compulsion to prohibit 
luxury. There is an ancient and nauseous fallacy to the effect 
that the extravagance of the rich gives employment to the 
poor. Nothing could be any farther from the truth. The 
extravagance of the rich gives much less employment to the 
poor than the accumulation and investment by the rich in 
various kinds of productive industry. The individual who buys 
extravagantly does of course set labor to work producing 
the objects of extravagance, but the individual who invests 
largely also sets labor to work producing the buildings, tools, 
etc. in which he invests. In addition to this he adds definitely 
to the productive power of the community. Furthermore, labor 
must be hired to make use of the buildings and the tools, and 
there is a larger social product out of which to pay their wages. 



THE CONTROL OF CONSUMPTION 493 

Comparatively speaking, therefore, the extravagance of the 
rich takes away from the employment of the poor. From that 
point of view extravagant consumption is a social injury. 

Leisure versus luxury. If, as suggested above, there were 
no ulterior results from the suppression of extravagance, the 
state would be fully justified in suppressing it ; but if the sup- 
pression of extravagance merely produced leisure and idleness, 
instead of extravagance, more harm than good would be done. 
We must conclude, therefore, that where a form of consumption 
has become so definitely vicious and injurious to the rest of soci- 
ety as to produce more harm than would probably be produced 
by compulsory suppression, then suppression must be justified. 
But where, even though it be harmful, it is not more harmful 
than other results which would probably follow from its sup- 
pression, then suppression is not justifiable. It must be 
remembered, however, that laws suppressing vice are in a 
sense sumptuary laws. The only difference between these and 
other sumptuary laws lies in the fact that the forms of con- 
sumption which they attempt to regulate or suppress meet 
with such general disapproval as to make their suppression 
popular, whereas in other cases the forms of consumption are 
not universally condemned and therefore their suppression is 
not generally approved. 

Rationing the people. That school of social philosophers 
who hold that all forms of competition are inherently evil, and 
that therefore government compulsion and regimentation should 
be made use of to stop competition, would, if they were con- 
sistent, desire to begin with sumptuary regulations. As stated 
in a previous chapter, there are three main forms of economic 
competition, — competitive production, competitive bargain- 
ing, and competitive consumption, — and of these three com- 
petitive consumption is infinitely worse than either of the 
others. By an authoritative standardization of wearing apparel, 
food, and other forms of consumption we should tend to 
eliminate this worst form of competition. That would involve, 



494 PRINCIPLES OF POLITICAL ECONOMY 

of course, the organization of society on a semimilitary basis, 
though the object need not be mihtary conflict. It would 
mean the prescribing of a satisfactory uniform for all members 
of the community, and also of a uniform diet or ration. 
Houses, furniture, and other consumable goods would also have 
to be standardized and prescribed by government regulations. 

There is no doubt whatever that if the people would accept 
this kind of regimentation and work cheerfully under it, we 
should prevent the waste of a vast amount of energy and 
avoid many petty jealousies and heartburnings. Academic 
costume, whatever may be said against it on other grounds, 
has the advantage of saving academicians a great deal of per- 
plexity over the question, '' Wherewithal shall we be clothed .? " 
The costumes and vestments of certain religious orders answer 
the same purpose. There are also many religious sects, of 
which the Quakers of the old school were a good illustration, 
which succeeded in saving their people from that destructive 
form of competition which strives, first, to outshine one's 
neighbors in matters of dress and, second, not to be outshone 
by one's neighbors. 

In a time of great national crisis we have many illustrations 
of what people may accomplish in the way of economy and 
effort by putting the whole nation on a fixed ration and also 
by prescribing the manner of dress of each class of the nation. 
If the people would submit cheerfully to similar regulations in 
time of peace, all the vast energy which in time of war is 
devoted to the work of destruction could then be turned to 
the work of production, and industrial progress could proceed 
at a stupendous rate. It is not impossible that at some time 
in the future there may be a real effort on the part of certain 
ambitious nations to economize their energy in this way in order 
that they may increase their strength rapidly in preparation 
for Armageddon. 



I 



CHAPTER XLII 

THE BATTLE OF THE STANDARDS 

Competitive and cheap standards of living. It has generally 
been taken for granted that the cheap standard of living would 
drive out a dear standard. It is asserted that people who are 
willing to live and multiply on a very small income will always 
tend to displace those who are unwilling to live and multiply 
except on a liberal income. If sheep and cattle are allowed to 
multiply and wander at will over the western ranges, it is plain 
that the sheep will drive out the cattle, not because they are 
superior in value or in fighting power, but merely because 
they are able to nibble closer to the ground and to live where 
cattle would starve. A similar law appears to operate through- 
out the human as well as the animal world. Those who can 
live on the least seem at times to be able to drive out all 
others by eating them out of house and home. 

It must be confessed that there are some facts which seem 
to support this conclusion. The American laborers on the 
Pacific coast find it very difficult to compete, at least in the 
unskilled trades, with the Chinese and the Japanese. On 
the Atlantic seaboard employers of labor have been able to 
tap various reservoirs of cheap labor, first in northwestern 
Europe, later in southern and eastern Europe. These laborers, 
having been accustomed to very small incomes, are able and 
willing to work and multiply on incomes so small as to drive 
out, at once or ultimately, either the American laborers or the 
immigrant laborers of a previous immigration. The later immi- 
grants drive the earlier immigrants out directly by accepting 
lower wages than the earlier immigrants are willing to accept ; 
they drive them out indirectly by multiplying rapidly and thus 

495 



496 PRINCIPLES OF POLITICAL ECONOMY 



I 



supplying a new stock of labor where the others would refuse 
to multiply. In many farming communities it is found like- 
wise that foreign-born farmers, who are willing to live on less 
than the American-born farmers, can, if necessary, pay either 
a rent or a price for land which would bankrupt the American 
farmer with his higher cost of living. Thus the land tends to 
pass into the hands of those farmers with the cheap standard 
of living. On the Pacific coast, again, the same tendency 
shows itself. The Chinese and Japanese farmers and gardeners 
are able to buy land and pay for it at a price which an American 
farmer with his higher standard of living would find impossible. 

A cheap standard does not always drive out a dear standard. 
It must be pointed out, however, that not every people with 
a low standard of living have high competing power. The 
Mexican peons have as cheap a standard of living as the 
Chinese coolies, and yet they do not compete successfully even 
with Americans, who have a higher standard of living. In 
other words, there must be coupled with a cheap standard of 
living considerable industrial efficiency. With equal industrial 
efficiency, the race with a cheaper standard of living seems to 
have the advantage in economic competition. On the other 
hand, with an equal standard of living, the race with the 
higher industrial efficiency has the same advantage in economic 
competition. In fact, we find that even with a more expensive 
standard of living, the race whose industrial efficiency expands 
in proportion to its cost of living holds its advantage in 
economic competition. 

Competing power is equal to production minus consumption. 
This brings us back to the formula which was used in a pre- 
vious chapter to express the value of a man : V= P— C. The 
value of a man is equal to his production minus his consump- 
tion. By his value we mean his value to his race or nation. 
That which he adds to the total resources of his nation in ex- 
cess of what he extracts from those resources is his net con- 
tribution to the strength of the nation. The nation will be 



THE BATTLE OF THE STANDARDS 49; 

strongest, in the long run, whose average citizen has the highest 
value in this sense. That nation will be weakest, in the long 
run, whose average citizen has the lowest value in this sense. 
But that citizen's value may be increased, not simply by reduc- 
ing his consumption but by increasing the difference between 
his consumption and his production. Adding to his produc- 
tion is just as essential as keeping his consumption within 
efficient bounds. 

If we seek a formula which will express the competing 
power of a whole nation, it must be very closely related to the 
formula which expresses the value of one of its citizens. That 
formula is CP = P— C \ that is, the competing power of a 
nation is equal to its production minus its consumption. The 
nation or the race in which there is the widest margin between 
production and consumption will win in economic competition 
against all comers. If the American farmer were enough more 
efficient as a producer than the foreign-born farmer to com- 
pensate for his higher cost of living, he could hold his own 
indefinitely in economic competition. It is not, therefore, the 
cheap standard of living which invariably wins ; it is the effi- 
cient standard of living. A race with an expensive standard of 
living, provided every dollar of expense adds something to its 
productive efficiency, will always win in competition with a race 
with, a cheap standard of living. If, however, the expensive 
standard is made expensive merely by the demand for luxuries 
and means of dissipation, the race is hopelessly handicapped 
and must ultimately lose in competition with other races. But 
if the cost of living is made high by the demand for strength- 
giving food and recreation, for means of mental stimulation, 
or for books, instruments of precision, and other means of tech- 
nical education, such a standard of living may increase the mar- 
gin between production and consumption rather than diminish 
it. In that case, not only can the race possessing such a stand- 
ard of living hold its own in competition at home, but the 
members of that race can go anywhere in the world and hold 



498 PRINCIPLES OF POLITICAL ECONOMY 

their own in competition against the natives. Such a race will 
be an expanding, colonizing race ; wherever its members plant 
themselves, they will succeed and remain ; whereas, if their 
standard of living is merely expensive without being efficient, 
they are likely to fail as colonizers. In the West, when such 
people fail and return to the East, they are said to be going 
back East to live with their wives' folks. 

International competition. A race with a high but inefficient 
standard of living sometimes finds it necessary to protect itself, 
at least within its own boundaries, against the competition of 
races with a cheaper but more efficient standard. Otherwise 
they would find themselves ultimately dispossessed even of their 
land. The race with the cheaper and more efficient standard 
would not only get the jobs in industry, but would eventually 
buy the farms and the businesses at prices which the natives 
would be unable to pay. The natives would give way before 
such a race as inevitably as before an army equipped with 
superior weapons of offense. 

Moreover, the problem is not solved by the mere exclusion 
from our own territory of races with a cheaper and more effi- 
cient standard of living. The conflict is merely changed to 
another field and the outcome postponed to a more remote 
period of time. International competition is just as real as in- 
dividual competition within the nation, though it does not 
seem so real to the average person. In the competition for 
the markets of the world the race with the cheaper and more 
efficient standard will have the same advantage as it would 
have in getting jobs or in buying farms and businesses within 
the confines of a given country. 

The race with the expensive or inefficient standard may 
hold certain advantages because of the peculiarities of its geo- 
graphical situation. If it possesses superior soil or superior 
mineral deposits, these physical advantages may compensate, in 
part at least, for the inefficiency of its standard of living and 
enable it to survive in international competition. Superior 



THE BATTLE OF THE STANDARDS 499 

mineral deposits, however, must ultimately be exhausted. 
Superior soil can be maintained only by wise management. The 
nation that depends upon these material advantages for its 
future strength in international competition must look well to 
its problem of conservation. If it does not, it will eventually 

. lose these advantages, and then its more expensive standard 
of living will place it under a severe handicap. If so, it need 

[ not necessarily perish as a nation, but at best it will live at a 

[ '* poor dying rate." 

Even under conditions of international peace, here is a form 
of international rivalry which will still persist and under which 
the victory must ultimately go to the race or the nation with 
the most efficient standard of living ; that is, to the race or 
nation in which the production of the average person exceeds 

j his consumption by the widest margin. 

i The real Armageddon. Here is a real Armageddon, the 
battle field of the nations, — the place for the ultimate contest 

! for supremacy among the various races and nations of the earth. 
This is the field where every nation in the world must sooner or 
later be brought to the test and made to battle for its very exist- 
ence. It is a peaceful contest, but none the less deadly on that 
account. Preparedness for this final and ultimate conflict will 
consist in the study of standards of living and the adoption of 
such standards and habits as will increase productive efficiency 
to the maximum and reduce the cost of living to the lowest 
point which is consistent with maximum productivity. In 
the interest of this form of preparedness it will be well for 
us to ponder the advice of Pythagoras to his son : '' Choose 
those habits which are best; custom will make them the 
most agreeable." 



PART SIX 

PUBLIC FINANCE 

Which has to do with the revenues of government and the utilization of 
those revenues by government , 

A great part of the study of public finance has to do with the technical details 
of the administration of taxing systems and the control of public expendi- 
tures. Therefore only the general principles of taxation are discussed in this 
book, which is a book for beginners. 



501 



I 



CHAPTER XLIII 



TAXATION 



Classification of revenues. The government as distinct from 
the people has needs of its own and must have revenue out of 
which to supply those needs. There are various sources of 
public revenue, but in modern times the chief source is taxa- 
tion. Henry C. Adams, in his work on finance,^ gives the 
following classification of public revenue : 



Public 
Revenue 



I . Direct revenue - 



a. Public domains 

b. Public industries 

c. Gratuities or gifts, or treasure-trove 

d. Confiscations and indemnities 





' a. Taxes 


2. Derivative revenue - 


b. Fees 

c. Assessments 




_ d. Fines and penalties 


r a. Sale of bonds or other forms of 
^ 3. Anticipatory revenue -j commercial credit 




^ b. Treasury notes 



In former times the public domain was made to supply a 
large part of the revenue for the government. In fact, under 
the feudal system, property in land and something resembling 
public office went together. The king had his own demesne ; 
so likewise did his retainers and all members of the nobility. 
The nobility formed the chief fighting class and likewise the 
administrators of local government, each deriving his income 
from the lands which were granted to him. 

Public industries have not figured very largely as sources of 
public revenue, unless royalties from mines could be put in this 

1 The Science of Finance, p. 227. New York, 1899. 
503 



504 PRINCIPLES OF POLITICAL ECONOMY 

class. A number of European cities have derived portions of 
their revenue from their own water, gas, and electric-Hght 
plants. Gratuities and gifts, as well as treasure-trove, are negli- 
gible sources nowadays. Confiscations and indemnities belong 
to a lower stage of civilization, where militancy and the lust for 
conquest prevail. In all civilized governments taxes have be- 
come the chief source of revenue, fees, assessments, fines, and 
penalties forming subsidiary sources. 

What is a tax ? A tax is a compulsory payment to the 
government for which the government does not return to the 
individual payer a commodity or a service. The money, for 
example, which one pays for a postage stamp is not a tax ; it 
is rather a purchase of a service. Where a municipality owns 
its own water supply and charges water rates, these rates are 
not in any proper sense taxes ; they are, like the purchase of 
postage stamps, payments for service. The same is true of the 
price paid for any direct service which the public renders. 

To be sure, the public renders general services for all its 
taxes ; but in the case of a tax there is no attempt to apportion 
the payment exacted of the individual to the benefit which he 
as an individual receives. Doubtless everyone receives some 
advantages from the existence of an army or a navy, of courts, 
or of policemen ; but his tax is not of the nature of a pur- 
chase, since he must pay the tax whether he thinks he is get- 
ting anything in return for it or not, and the amount of the 
tax bears no relation whatever to what he thinks the value of 
the service of the State may be to him. 

Some taxes are absolutely compulsory. Others are compul- 
sory only conditionally. An income tax, an inheritance tax, or a 
poll tax is absolutely compulsory. The individual has no choice 
in the matter. An excise or a tariff duty may be avoided by 
avoiding the use of the articles on which these duties are levied. 
One may avoid the excise duty on tobacco, for example, by 
refraining from the use of tobacco. And yet when one pays 
this tax, he is not receiving from the government a service. 



TAXATION 505 

since the government did not produce the tobacco but only 
charges the manufacturer or the dealer for the privilege of 

* manufacturing and selling. 

So-called indirect taxes. The taxes just described are gener- 
ally called indirect taxes. In case of a tariff duty, for example, 
the importer of the dutiable article pays the tax directly to the 
government. From his point of view it is just as direct as any 
tax. It is the general theory, however, that the consumers of the 
imported articles pay the tax in the form of higher prices. In 

I cases where that happens the consumers may be said to pay the 
tax indirectly. This is by no means always the case, however, and 
it is not always easy to determine who does actually pay the tariff 
duty. It is therefore doubtful whether or not the term indirect 
taxation should be retained in economics. All real taxes are 
direct in the sense that the payers pay their money directly 
to the government. In some cases, however, the payer is able 

I to shift the tax to somebody else by charging a higher price 

I for a product or by paying a lower price to the one from whom 
he himself buys the product. The manufacturer of alcoholic 
liquor pays his excise duty as directly to the government as any 
other tax ; but if he charges the consumer a higher price for 
the liquor, the consumer is then said to pay the tax indirectly ; 
but he may also pay the producer of the raw materials a lower 
price, and in that case it is the producer who pays the tax, in 
part at least ; and if the manufacturer carries a part of the 
burden which he is unable to shift to someone else, he him- 
self bears that burden directly, not indirectly. 

Taxes and monopoly price. A common abuse of the word 
taxation is to apply it to monopoly price by saying that the 
monopoly taxes the people. It is sufficient in a case of this 
kind to say that the monopoly charges too high a price, or 
a monopoly price ; it does not add anything to the clarity of 
the discussion to bring in the word tax. Where the mo- 
nopoly sells a commodity or a service, even though it sells 
it above cost, the individual gets what he thinks ought to 



506 PRINCIPLES OF POLITICAL ECONOMY 

be the equivalent of what he pays ; otherwise he would not 
have purchased the article. Similarly, the government might, 
if it chose, charge more for postage stamps than the cost of 
carrying the parcels. This would not properly be called a 
tax ; the proper expression would be to say that the govern- 
ment is charging a high price. 

Eliminating compulsion in public business. Even where the 
government derives a part of its revenue from a public industry, 
the element of compulsion is generally present. If the revenue 
from the industry does not pay the expenses, the industry can- 
not become bankrupt and its affairs be wound up by legal 
proceedings. The government can merely tax the people or 
derive an enforced revenue from some other source to pay the 
deficit ; that is, it can use its power of compulsion to keep 
alive an unprofitable industry, whereas an individual or private 
corporation lacking the power of compulsion would have no 
power to keep its business alive. 

Again, it will generally be found that the government exer- 
cises some compulsion by excluding competitors from its own 
particular field. No one is allowed to compete directly with the 
federal post office in carrying first-class mail. The govern- 
ment's power of compulsion is exercised in its own behalf. In 
fact, it is doubtful if there is a case on record where any gov- 
ernment has succeeded in doing anything well on a purely vol- 
untary basis. It has had to use its power of compulsion at some 
point or other in the enterprise. It has either raised funds by 
compulsion or excluded competitors by compulsion, has re- 
pressed opposition and criticism by compulsion, or in some 
other way made use of this great advantage which it possesses 
over all private organizations in order to insure its success. 

These observations are made not for the purpose of criti- 
cizing or opposing government enterprise, but merely in the 
interest of truth and accuracy. Government is compulsion ; 
and when properly exercised, compulsion is beneficent. One 
of the great and really unsettled questions, however, is as to 

I 



TAXATION 507 

:he limits within which compulsion is beneficent and beyond 
-which it is interference. 

Earmarks of a good revenue system. Henry C. Adams gives 
the following as the marks of a good revenue system, (i) It 
must be adequate to the just wants of the state. (2) It must 
present itself as a system and not as an aggregation of inde- 
pendent and unrelated acts. (3) In a federated government 
such as we have in the United States the revenue domain of 
one branch of the government should not encroach upon the 
revenue domain of another in such a way as to bring confu- 
sion. In other words, there must be harmony and balance 
between the central and local governments, between the local 
governments themselves, and between the several organizations 
of local government. (4) It should provide for elasticity of the 
revenue at the point where elasticity is needed; that is, the 
revenue must be capable of increase and decrease whenever 
and wherever it is needed. 

I Double taxation. The second of these is of particular im- 

! portance in the United States of America. Paraphrasing the 

, famous rule of the Donnybrook Fair, we have apparently fol- 

[ lowed the rule, "Wherever you see a thing, tax it." This has 

I led to a great deal of confusion, — to double taxation in some 

cases and to complete escape from taxation in others. By double 

I taxation is meant taxing an individual or different individuals 

twice for the same thing. If, for example, a farmer owns a 

piece of land and also has in his possession a piece of paper 

called a deed to the land, and if he is taxed once on the land 

and again on the deed to the land, that is obviously a case 

j of double taxation. If, however, one farmer owns a piece of 

I land and another owns a mortgage on it, the owner of the 

mortgage is virtually, if not literally, a part owner of the land. 

If, now, the farmer pays taxes on the full value of the land, 

and the mortgage owner pays on the full value of the mortgage, 

there is an equally clear case of double taxation. The double 

' tax really falls on the farmer, because, where mortgages are 



5o8 PRINCIPLES OF POLITICAL ECONOMY 

taxed, the interest rates are made higher in order to recoup 
the lender for the tax which he has to pay. 

At the present time our federal government is selling large 
numbers of bonds bearing 3^^ per cent interest. One of the 
arguments is that, since they are free from taxation, one 
receives practically as much net income as he would receive 
on taxable property yielding nominally 5 per cent but being 
taxed li per cent. Where mortgages are not taxed, the same, 
argument would apply and would be effective. If in one state 
a lender is compelled to pay a i|-per-cent tax on his mortgage, 
and in another state he does not have to pay any tax, if he is 
an honest man he would as lief lend at 3 J- per cent in the 
latter state as at 5 per cent in the former. If he is dishonest, 
however, he may take his chances on avoiding taxation in the 
former, and if he succeeds he may receive his 5 per cent net. 
Again, where a corporation owns certain amounts of visible 
property, but the shareholders have pieces of paper as evidences 
of their ownership in undivided shares of this property, if the 
visible property is taxed and the individuals are also taxed on 
the pieces of paper which they hold as evidences of ownership, 
the effect is very much the same as though the farmer were 
taxed on his farm and also on the deed which, like the share 
in a corporation, is only an evidence of ownership. 

Overlapping of tax systems. The third of these marks of 
a good system is also important in this country. The conflict 
of jurisdictions between federal and state governments, and 
between the state governments themselves, has produced a 
great deal of confusion and also a great deal of double taxa- 
tion. Various remedies for this situation have been proposed, 
among others the subdivision of the various sources of reve- 
nue, each grade of government to be allowed its own par- 
ticular source. The federal government, for example, is by 
the Constitution given exclusive right to levy duties on im- 
ports. Since no state or municipality is permitted to enter 
this field, there is no confusion there. It has also been 



TAXATION 509 

suggested that real-estate taxes should be left exclusively to 
the local governments, — municipalities, counties, and town- 
ships. It is thought by certain writers that licenses and fran- 
chises also should be left exclusively to local governments. 
Incomes and inheritances would seem to be suitable subjects 
for state taxation. Stamp taxes of various sorts must appar- 
ently be left to the federal government. 

No very clear dividing line has been generally agreed upon 
for the separation of federal from state sources of revenue. 
Certain writers of high authority hold that the income tax 
should belong exclusively to the states and that the federal 
government should keep out of this field. Their views, how- 
ever, have not received general public support. We already 
have duplication in this field ; that is, in most of our states we 
have income taxes in addition to the federal income tax. 

Inelasticity of inheritance taxes. The inheritance tax is an 
excellent source of revenue, being very productive ; but it should, 
from the nature of the case, be a permanent tax not often to be 
changed. In the course of a generation practically every estate 
will pass by inheritance and be taxed. But in any given year 
or decade only a certain percentage of them will pass by in- 
heritance and be taxed. If, therefore, the tax is changed fre- 
quently, different estates will bear very different burdens. If, 
during a few years, a very high inheritance tax prevails, the 
few estates that pass by inheritance during those years will 
bear a heavy burden ; and if, during another few years, there is 
a very low tax, the estates which pass in inheritance during 
those years will bear a very light burden. 

An income tax, however, may be changed frequently with- 
out injustice to individuals. Everyone who receives a taxable 
income is likely to receive it every year. The tax may be 
changed every year without showing any discrimination in favor 
of or against individuals. This would seem to make it neces- 
sary that an inheritance tax should be permanent and be the 
source of a considerable revenue, but that elasticity should be 



510 PRINCIPLES OF POLITICAL ECONOMY 

secured from an income tax, which may be changed frequently 
as occasion demands an increase or decrease of pubUc revenue. 

The characteristic form of American taxation, however, is 
what is known as the general property tax. Nearly every state 
in the Union has had, either in its constitution or on its statute 
books, laws requiring the equal taxation of all forms of prop- 
erty. In many cases this has worked to the utter confusion 
of our financial system. One result is that visible property is 
taxed and invisible property escapes. The farmer's land and 
buildings, livestock and machinery, can scarcely be hidden, and 
the assessor finds them. Many of the intangible and invisible 
forms of property, however, are difficult to find and can fre- 
quently escape taxation. Strange as it may seem, many rural 
districts show a larger percentage of personal property and a 
smaller percentage of real estate than most of our cities, be- 
cause much of the farmer's personal property (machinery, tools, 
etc.) is of a kind that cannot well be hidden. No one really 
believes that farmers own a larger percentage of personal 
property and a smaller percentage of real estate than city 
people, and yet the assessors' books indicate that they do. 

Progressive taxation. Various expedients have been adopted 
to make taxes more just than they are under the crude general 
property tax. Among these laws one of the most important 
is what is known as the graduated or progressive tax. This 
may apply either to general property, to incomes, or to inherit- 
ances. The principle of the progressive tax is that the larger 
the sum to be taxed, the higher the rate of taxation. To begin 
with, even an exemption operates to a slight extent as a pro- 
gressive tax. An income tax which exempts, let us say, ;^2000 
from all taxation and taxes only the excess above ;^2000 is 
slightly progressive, even though it is nominally proportional. 
A tax of I per cent on the excess over ^2000 would work 
somewhat as follows : On ^3000 the tax would be ;^io, which 
is one third of i per cent on the whole income ; on $4000 the 
tax would be ^20, which is one half of i per cent on the whole 



TAXATION 511 

ncome ; on $6000 the tax would be $40, which is two thirds 
)f I per cent on the whole income. 

A genuinely progressive tax, however, proceeds farther than 
;his. It begins, let us say, with a i-per-cent tax on the excess 
above ^2000, i per cent more on the excess above ^10,000, 
md I per cent more on the excess above ^50,000, and so on. 
Under this scheme, then, the individual who had an income 
Df ^60,000 a year would pay i per cent on $58,000 (the ex- 
:ess above $2000), 2 per cent on $50,000 (the excess above 
^10,000), and 3 per cent on $10,000 (the excess above $50,000), 
making a total of $1880. Whether the tax be an income tax, 
an inheritance tax, or a tax on general property, the principle 
3f the graduated tax is the same. 

Canons of taxation. Adam Smith, in his ''Wealth of Nations," 
laid down what have since his day been called the canons of 
taxation. They are as follows : 



I (i) The subjects of every state ought to contribute towards the support 
of the government, as nearly as possible, in proportion to their respective 
abilities ; that is, in proportion to the revenue which they respectively enjoy 
under the protection of the state. ... (2) The tax which each individual is 
bound to pay ought to be certain, and not arbitrary. The time of payment, 
the manner of payment, the quantity to be paid, ought all to be clear and 
plain to the contributor, and to every other person. ... (3) Every tax ought to 
be levied at the time, or in the manner in which it is most likely to be con- 
venient for the contributor to pay it. . . . (4) Every tax ought to be so contrived 
as both to take out and to keep out of the pockets of the people as little as 
possible over and above what it brings into the public treasury of the state.^ 

The first of these relates to the general question of justice ; 
the. others are so obviously practical and expedient that there 
has never been any serious discussion of them. A great deal 
of discussion, however, has centered round the first. Just what 
is meant by ''in proportion to their respective abilities " has 
never been definitely decided. At first thought it sounds as 
though this meant proportional rather than progressive, or 

1 Adam Smith, The Wealth of Nations, Vol. II, pp. 414, 415, 416. 



512 PRINCIPLES OF POLITICAL ECONOMY 

graduated, taxation. If we assume that a man's ability is in 
exact proportion to his income, then obviously if he pays in 
proportion to his ability he must pay in proportion to his in- 
come. But it is contended that a man's ability to pay increases 
more than in proportion to his income, and that therefore if 
he pays in proportion to his ability, he must pay a progressive, 
or graduated, tax on his income or his property. That there is 
some justification for this opinion is evidenced by the almost 
universal practice of exempting a certain minimum. The indi- 
vidual whose income is barely able to support him and his 
family may be said literally to have no ability to pay taxes, and 
yet he has an income. If his income is slightly greater than 
necessary to support himself and his family, then he may be 
said to have some ability to pay taxes. This obviously calls 
for a certain degree of progression in the way of taxation. 

Repressive taxation. The tendency is more and more for 
expert opinion to favor some sort of progressive, or graduated, 
taxation as more just than proportional taxation. Just how far 
in this direction we should go is not easy to determine. It is 
never wise to kill the goose that lays the golden eggs. Neither 
is it ever wise to tax anyone so heavily as to drive him out 
of productive business. If taxes are ever made so heavy upon 
people who are carrying any large enterprises as to discourage 
accumulation, enterprise, and thrift, the state will be doing 
itself an injury. Professor E. A. Ross ^ has suggested a new 
canon of taxation to add to the four which Adam Smith gave 
us : A tax should be as little repressive as possible. 

The sum and substance of all sound taxation is that the 
taxes should be as little burdensome as possible. The burden 
of a tax is twofold. There is, in the first place, the disadvan- 
tage to the payer of the tax. It is a loss to him to have to 
give up his revenue. In the second place, there is the dis- 
couragement to enterprise which a heavy tax involves. This is 

i"A New Canon of Taxation" (abstract), Publications of the American 
Economics Association (1893), Vol. VIII, pp. 49-50. 



TAXATION 513 

particularly disastrous when the government is irregular and 
whimsical in its taxing moods. When producers never know 
what to expect from the government and its tax collectors, 
they have little inducement to enterprise. Under such condi- 
tions there will be little wealth produced for the government 
to tax, and things are likely to go on from bad to worse. 

In case there are undesirable businesses which the govern- 
ment does not care to prohibit, or undesirable habits which 
the government does not care to suppress, the repressive 
power of taxation may be used. Men may then be made to 
pay for their folly, or to give up their folly to avoid taxation. 
In extreme cases complete suppression is doubtless better 
than mild repression ; in milder cases, such as luxurious con- 
sumption, ostentatious dressing, etc., the mildly repressive 
effect of a tax is desirable. 



CHAPTER XLIV 

THE FINANCING OF A WAR 

What is meant by the financing of a war. By the financing 
of a war is meant the keeping of the National Treasury sup- 
pHed with money with which to purchase mihtary supphes and 
pay other war expenses. This problem should be kept distinct 
from the physical problem of producing supplies and war 
materials. The latter is a problem not for the financial expert 
but rather for the industrial engineer, the business manager, 
or some other expert in the organization and coordination of 
the factors of physical production. While the financial prob- 
lem is one of tremendous importance, it is not only less 
important but also very much less difficult than that of pro- 
ducing the supplies themselves. 

Financial problems less difficult than problems of production. 
Difficult as is the financial problem, all the factors are within 
the control of the government, or at least of the people behind 
the government. Consequently, if they fail in their attempts 
to handle the problem, they have only themselves to blame ; 
their failure cannot be laid to the physical difficulties or to 
factors which lie beyond their own control. In short, the fail- 
ure will be due to the stupidity of their rulers or of the people 
who refuse to support a sound financial policy on the part of 
the rulers. The problem of producing supplies, on the other 
hand, especially on the part of a beleaguered country, may 
depend upon factors which lie beyond the control of either 
government or people. For example, the difficulties of the 
South during the Civil War were on the physical side insuper- 
able ; they were hemmed in by blockading fleets and invading 
armies. On the financial side, however, their difficulties were 



THE FINANCING OF A WAR 515 

of their own creation. In other words, the difficulties in the 
way of supplying themselves with horses, salt, nitrogen, and 
a number of other necessaries were insuperable, but the diffi- 
culties which they, as well as the Northern people, had in find- 
ing money with which to pay for such supplies as they could 
get were within their own control. 

In most of our discussions of the problems of war finance, 
too little attention is given to certain large elementary princi- 
ples. The practical financiers are fully absorbed with the details 
of the problem, and the financial writers in the ephemeral press 
are more concerned with finding out what the people want them 
to say, and then saying it, than they are in getting at the root 
of the problem. 

Speeding up the circulation of money. One large economic 
fact which greatly simplifies the financing of a war is that an 
increase in the rapidity of the circulation of money has, in all 
essential particulars, the same effect as an increase in the 
physical quantity of money. To double the speed of circula- 
tion, for example, enables a given quantity of money to do 
twice as much work. Analogies, though often dangerous, are 
sometimes useful. A useful one is found between the circula- 
tion of blood in the human system and the circulation of money 
in the country. When increased muscular exertion calls for 
increased supplies of blood in the limbs, it is not necessary 
to increase the total volume of blood ; the need is met by in- 
creasing the rapidity of the circulation. But in order that the 
heart may send increasing quantities of blood per unit of time 
to those parts where it is demanded, it must have means of 
getting increased quantities per unit of time back again from 
the extremities; in other words, the problem of getting the 
blood back again is obviously as important as that of pumping 
it out to the places where it is needed. The National Treasury 
is confronted by a similar problem in time of war. It is called 
upon to send out money in increasing quantities to pay the 
enormously increased expenses of the government. In order 



5i6 PRINCIPLES OF POLITICAL ECONOMY 

that it may always have sufficient money to pay out for war 
suppHes at an extraordinary rate, it must find means of getting 
it back again at the same extraordinary rate. Since all the 
money not actually in the Treasury is in the hands of the peo- 
ple, it is they who must be induced to return it to the Treasury 
at this extraordinary rate. If the rulers can devise a plan for 
doing this, and if the people are sufficiently wise, devoted, and 
loyal to support the plan, there will be no difficulty in the 
financing of a war. These are two very large '' ifs." 

More money not absolutely necessary. Another large fact 
of even greater importance is that the country, as distinct from 
its government, does not need very much more money in time 
of war than in time of peace, except for the purchase of for- 
eign supplies. So far as its domestic economy is concerned, 
it needs only a little more. There are not many more men to 
be hired ; there is not much more work which can be done, 
because there are not many more men to do it ; and there are 
not many more goods to be bought in time of war than in time 
of peace. The difference is that the government, instead of 
private individuals, must hire the men and buy the goods. 
This makes it physically necessary that private individuals 
should hire fewer men and buy fewer goods. 

Private consumption must be cut down. For example, when 
I am spending my income in time of peace, I am merely hiring 
men to make things for my consumption and to wait upon 
me. All the men in the country are presumably engaged in 
producing things for consumers and in waiting upon them, 
that is, upon one another. In time of war it is necessary that 
a large number of men stop producing things for private con- 
sumption and waiting upon one another as private consumers, 
and begin to produce things for the government and to wait 
upon the government and serve it as soldiers. It is physically 
impossible for them to do this unless private consumers are 
willing to consume less, and to wait upon themselves instead 
of hiring others to do so. Moreover, it need not take any 



THE FINANCING OF A WAR 517 

more money to hire these men to work for the government 
than to hire them to work for private consumers. 

If, for example, I am spending so much on myself that it 
takes, in the aggregate, ten men to make things for my con- 
sumption and to wait upon me, it will be necessary in time of 
war for me to live on less, because the government must have 
some of those ten men. Another way of saying the same thing 
would be to say that I need these ten men to work for me in 
another capacity in time of war ; I need them to produce war 
supplies and fight in my defense. The government is my 
agent in hiring these men and directing the fighting ; there- 
fore I must turn a part of my income over to my agent, the 
government, to hire some of those ten men, while I, with the 
remainder of my income, may hire the rest to continue work- 
ing for me. What has just been said in the first person singu- 
lar can be repeated in the first person plural, and thus it will 
include us all. 

The private consumer bids against the government for man 
power. If we are all left undisturbed in the enjoyment of our 
income, and continue spending it in such a way as to require 
as many men as before to produce for and to wait upon each 
of us, while our agent, the government, without taxing us, 
undertakes to find means to hire the men whom it needs, we 
shall, each and every one, be competing for these men against 
our own agent, the government. If the government opens a war 
chest, or gets its money from another source than our incomes, 
it will have to bid against us to get men to work and to fight 
for it. Literally, the government will be trying with a lot of 
new money to hire them away from us, while we are trying with 
our full income to hire them away from the government and 
keep them working for us. Aside from the obvious futility 
and stupidity of this process, it results in inflation of prices, no 
matter what the source of the government's money may be. 
, Taxation enforces economy in private consumption. Here is 
the first great mistake which almost every government has 



5i8 PRINCIPLES OF POLITICAL ECONOMY Jj 

made, up to the present time, in its efforts to finance a war: j 
it has hesitated to tax its people. The only sound method of ' 
financing a war is to tax the people, and tax them to the bone, 
Unless it has a war chest which it can open, or unless it issues |: 
a lot of new currency, it must get its money from its citizens, 
in the form either of loans or of taxes. If it does not do one 
of these things, there is no possibility of avoiding that conflict [ 
which has just been described. Leaving the people with their: 
incomes and purchasing power unimpaired will permit them 
to continue spending their incomes as before, and that spend- !i 
ing of income is a demand for men to produce supplies for' 
private consumption and to wait upon the consumers. The 
only way, then, in which the government can get these men 
is to outbid the private consumers with its new money. This j 
competition between the private consumers and the govern-; 
ment for men and supplies cannot by any possibility result in ' 
anything else than an inflation of prices. 

Issuing new money a mistake. Even when the government 
has accumulated a war chest of specie, this money will be used , 
to outbid private consumers for men and supplies, which willj 
result in an inflation of prices. Where the government issues, 
or causes to be issued, a lot of new credit currency, in order to : 
avoid taxation, the difficulty is exaggerated, for there is not| 
only an inflation but a grave danger of depreciation. I 

Contrary to a very widely accepted theory, there may be anij 
inflation without any use whatever of credit currency, though l| 
this is possible only where a large quantity of standard coin,:j 
or metallic money, is injected into the circulation after having! 
been hoarded in the public treasury. The way it gets into cir- ^ 
culation in the beginning of a war is through its use by thej 
government in purchasing supplies and hiring men; all thej 
private individuals, with their incomes unaffected, continue pur-j 
chasing supplies and hiring men as before ; and it is this com- 
petition of the government, with its new money, against private | 
consumers, with their old money, that starts prices upward and; 



THE FINANCING OF A WAR 519 

causes inflation. It makes very little difference whether the 
new money which the government uses in these purchases is 
coin which has been hoarded or credit currency which is issued 
, for a special purpose, except where the latter becomes so ex- 
, cessive in quantity as to cause it to depreciate in terms of coin. 
. Individuals must purchase less if the government is to pur- 
I chase more. The first and fundamental conclusion, therefore, 
I is that in order to avoid inflation the people must purchase less 
i in proportion as the government purchases more. The only 
way to force them to purchase less is to get their money away 
from them. This may be done by several methods as follows : 
The first method is that of voluntary loans. People who 
have been spending their money for other things may be in- 
duced to spend it for government bonds. They must then cut 
down their purchases of supplies. This reduces the demand 
for men to produce supplies for private individuals. These 
men who are released from general industry are then available 
to be hired by the money which is now in the hands of the 
government. This cannot result in inflation. 

Another method is that of forced loans, — the comman- 
deering of the supplies of money in savings banks and other 
places of deposit. This is virtually the system of conscription 
as applied to money. Whatever else may be said against this 
method, it cannot be said to result in inflation, because the 
people whose money is taken away have less to spend, and 
therefore they do not compete with the government in hiring 
men and buying supplies. 

Still another method, and the one which ought always to be 
followed as far as possible, is that of taxation. This is likewise 
a system of conscription, — the conscription of incomes as dis- 
tinguished from the conscription of men. It is better than 
the forced loan because it applies to all incomes and does 
not penalize those who have shown suflficient frugality and 
thrift to save and deposit a part of their income instead of 
consuming it all. 



520 PRINCIPLES OF POLITICAL ECONOMY 

The most futile of all methods is that of issuing temporary 
credit currency, to be repaid out of war indemnities after a 
victory. There is, however, one condition under which it may 
be necessary for the government to have available, in the form 
either of a war chest or of a credit currency, a new supply of 
money. It usually takes some months to get the taxing machin- 
ery going so as to increase the government's income mate- 
rially. It may be necessary, in order to tide over these few 
months, to make use of some extraordinary reservoir of cur- 
rency. Usually, however, and always if the credit of the gov- 
ernment is good, the large sums needed at the beginning of 
a war can be secured quickly by means of voluntary loans. 
This is the first and greatest argument in favor of raising 
money by loans rather than by taxation. 

Another argument is that by borrowing the money the finan- 
cial burdens of the war may be distributed over a longer period 
than if the money is raised by taxation. It is sometimes said, 
rather shamelessly it is true, that the people have burdens 
enough in time of war without having to pay extraordinary 
taxes. The fact is, however, that those who do not go as sol- 
diers, or give their services directly to the government, bear 
no burdens whatever except taxes. Most of them, in fact, 
prosper in time of war. Many a respectable family is still 
living on wealth accumulated out of the profits of business 
during our Civil War, while their neighbors were spending 
their time in the unremunerative work of the soldier. War is 
not, in fact, a burden upon the whole generation. It is a bur- 
den only upon those who do the work of war and those who 
pay the expenses of war. If war taxes are not increased, 
many will absolutely escape all war burdens. The question is 
not, therefore, that of distributing the burden over several gen- 
erations but of distributing it over all the individuals of 
each generation. 

A third reason for borrowing is found in the necessity of 
purchasing foreign supplies. In time of war the national 



THE FINANCING OF A WAR 521 

production of articles for private consumption must necessarily 
be reduced in order that the country may recruit its armies and 
produce military supplies. Consequently it cannot send so much 
produce abroad ; at the same time it will, in all probability, 
need to increase its imports from foreign countries. These 
imports, therefore, must be paid for largely with money. In 
order to meet these foreign payments, extraordinary sources of 
monetary supply must be tapped; literally, the money which 
is sent abroad for the purchase of supplies must be got back 
again. Since the foreign countries cannot be taxed, it must be 
borrowed back, perhaps over and over again, in order to make 
continual purchases. Here is where the credit of the country 
may be strained. In this case, however, the country's finan- 
cial failure would be due primarily to its inability to produce 
its own supplies, rather than to anything inherent in the prob- 
lem of war finance. The country must either be able to pro- 
duce its own supplies or else have credit enough to buy them 
from abroad. 

Production of war supplies must be vastly increased. In 
considering the relative merits of taxing and borrowing as 
means of financing a war, we must never lose sight of certain 
basic and incontrovertible facts. One is that if we are to put 
several million men into the army and navy, it will be neces- 
sary to put several million others into the munition factories, 
shipyards, and other establishments for the production of war 
supplies. We must even increase the output of our mines 
and especially of our farms, in order to provide the raw 
materials and the food supplies. All this will require a good 
many millions of men. These men cannot be created out 
of nothing. 

Sources of additional man power. There are three sources 

from which this additional man power can be drawn. In the 

first place, those who are now at work may work a little harder, 

; either by speeding up or by working longer hours. In the 

second place, those who are not now at work may be put to 



522 PRINCIPLES OF POLITICAL ECONOMY 






work. In the third place, those who are at work in the indu: 
tries which are not indispensable may be withdrawn from them 
in order to expand the industries that are indispensable to the 
prosecution of a war. 

The first two of these sources of man power may be suf- 
ficient if the war is to prove a trivial affair ; but if it is to be 
a serious affair, we shall have to draw upon all three, and 
particularly upon the third. It will be absolutely impossible 
to continue running the luxury-producing industries or the 
industries which produce superfluities at the rate which is 
possible in times of peace. If the government needs the man 
power which has been engaged in producing luxuries and 
superfluities, individuals must perforce cut down their con- 
sumption of such things. There is no alternative. 

Enforced economy. It will not always be necessary, however, 
for the government by authority directly to forbid us to con- 
sume these things. This enforced economy will come about 
in other ways. The government must have money with which 
to pay its soldiers and sailors and to buy its munitions and 
supplies. We citizens of the Republic shall be called upon to 
supply the government with this money. The money will 
be taken either in the form of taxation or in the form of 
voluntary loans. 

This, in short, is exactly what we are called upon to do by 
any system of war finance, whether it be the slacker's system 
or the patriot's system. Under the slacker's system it is pro- 
posed that we shall not make a strenuous effort to pay a large 
proportion of the war's expenses as we go along, but that the 
government shall borrow the money in order to avoid dis- 
turbing us who stay at home, and in order that the young 
fellows who go to the front may help pay for the war after 
they return home — if they do return home. The patriot's 
system is the proposal that we make strenuous efforts to pay 
as large a proportion as possible of the war's expenses as we 
go along, in order that we who stay at home may bear at least 



[ 



THE FINANCING OF A WAR 523 

a reasonable fraction of the burden which will be borne by 
those who go to the front, and not ask those who return home, 
having borne the real burden of the war, then to help pay 
back to us the money which we loaned to the government. 

Characteristic fallacies. It is necessary, however, to clear 
away certain confusions which arise. The sources of this con- 
fusion are mainly embodied in the following statements: (i) 
Excessive taxation upon consumption will cause popular re- 
sentment. (2) Excessive taxes on industry will disarrange busi- 
ness, dampen enthusiasm, and restrict the spirit of enterprise 
at the very time when the opposite is needed. (3) Exces- 
sive taxes on incomes will deplete the surplus available for 
investments and interfere with the placing of the enormous 
loans which will be necessary in any event. (4) Excessive 
taxes on wealth will cause a serious diminution of the incomes 
which are at present largely drawn upon for the support of 
educational and philanthropic enterprises. (5) Excessive taxa- 
tion at the outset of the war will reduce the elasticity available 
for the increasing demands that are soon to come. 

As to the first of these objections, it is political rather than 
economic. Such a tax as is proposed will cause popular resent- 
ment only on condition that the people are crudely ignorant 
or unpatriotic, — that they are ignorant enough to imagine that 
the expenses of the war can be paid out of nothing or unpa- 
triotic enough to be unwilling to bear the necessary burdens 
of the war. Even though it should cause popular resentment, 
it would not affect in one way or another the economic wisdom 
of such a policy. It is one thing to say that a policy is 
economically sound ; it is quite a different thing to say that 
the people know enough about economics to understand its 
soundness. An autocrat who was trying to determine just how 
much his people would stand might well consider this ques- 
tion. In a democracy, however, the people need not stop to ask 
themselves how much they themselves will stand, or whether 
their own voluntary acts would cause resentment in themselves. 



524 PRINCIPLES OF POLITICAL ECONOMY 

As to the second proposition, it is only necessary to point 
out that a great war, absorbing several millions of men of pro- 
ductive age either in the actual fighting or in the production 
of supplies for those who do the fighting, cannot possibly be 
carried on without a good deal of disarrangement of business. 
Moreover, there will be the same disarrangement of business 
whether we turn our money over to the government voluntarily, 
and thus voluntarily cut down our ability to purchase supplies 
for private consumption, or whether we turn the same amount 
of money over to the government in the form of taxes. As 
to the suggestion that heavy taxes will dampen enthusiasm and 
restrict the spirit of enterprise, that is a question of national 
psychology. It is hardly probable that citizens will restrict 
enterprise and have their enthusiasm dampened by taxes the 
reason for which they understand and approve. In fact, 
reasonably heavy taxes, for a purpose which they understand 
and approve, will probably spur them on to greater effort and 
enterprise, — will cause them to work longer hours and take 
shorter vacations in order to be able to pay them. 

The third proposition is absurd. The money which is raised 
by taxation will not have to be raised by loans. The only 
possible way in which heavy taxes can interfere with the plac- 
ing of enormous loans is by making the enormous loans 
unnecessary. Even with the proposed tax, loans will be neces- 
sary, but the less there is raised by taxation, obviously the 
more there must be raised by loans. 

The fourth proposition has some merit, but it may well be 
asked whether, in a time of great national crisis, even phil- 
anthropic work which is not connected with the war should 
not be somewhat curtailed. A great deal depends upon how 
desperate the crisis is. All needless luxuries and every form 
of consumption except those which are indispensable should 
of course be cut off first. If this is done, most of the 
philanthropic work can still be carried on. 

The fifth proposition can mean nothing more than that if we 



THE FINANCING OF A WAR 525 

tax ourselves to the limit at the start, we cannot later on increase 
taxes by as large a percentage as we could if we taxed ourselves 
lightly at the start. True enough ; but it would not be necessary. 

One of the naive objections to the policy of paying a large 
proportion of the expenses of the war by taxes is that when 
expenditures approach the gigantic sums of present-day war- 
fare such a tax policy would require more than the total sur- 
plus of social income. If by social income is meant money 
income, it will apply to loans as well as to taxes. The people 
cannot turn over to the government, either by loans or by taxes, 
more money than they have or can lay their hands upon. 
They have just as much money to pay to the government in 
the form of taxes as they have in the form of loans. The 
possibilities are exactly equal in either case. It is only a ques- 
tion as to which is the better policy or the better method of 
getting that money into the government treasury. 

If, however, by social income is meant the products of indus- 
try and enterprise, the proposition becomes an absurdity. No 
nation can put into a war more than its total surplus social 
income ; that is, more than it can produce over and above what 
is necessary to maintain the life of the people. That would be 
like saying that it is necessary for a country to put into the war 
more than its total man power. 

The real cost of the war cannot be postponed. Another 
basic, and indisputable fact which we should bear in mind is 
that the expenses of the war, measured in productive power 
and goods, or measured as all costs must ultimately be meas- 
ured, namely, in energy expended, will actually be paid as we 
go along, whatever our financial policy. Soldiers cannot use 
guns and ammunition, nor consume rations, which are to be 
produced in the future. Everything that is actually used in 
the war will be produced before it is used ; the cost, in terms 
of energy, will have been paid. In terms of real income, as dis- 
tinct from money income, the war will actually be supported by 
current income ; that is, out of the products of current industry. 



526 PRINCIPLES OF POLITICAL ECONOMY 

The only question before us is, Where and how will the gov- 
ernment get the money with which to pay for these things ? 
It can raise it largely by taxation or largely by loans ; in any 
case it will have to use a combination of both methods. The 
patriotic theory is that it should raise as much as possible by 
taxation and borrow only as a supplementary measure. It would 
take some time to get the taxing machinery in operation, and 
the money which it puts into the treasury would come in 
gradually. At the beginning of a war a large sum must be 
had at once. The only possible way to raise that initial sum 
is by borrowing. The slacker's theory is that the war should 
be financed as far as possible by loans, — that taxes should be 
increased only in order to pay the necessary interest on these 
loans and such other necessary expenses as it seems expedient 
to pay out of the proceeds of the loans. 

Therefore the real question, stripped of all verbiage, is simply 
this. Shall those who stay at home pay for a war as far as pos- 
sible as they go along, or shall they ask the government to 
borrow the money in order that they may not be too much dis- 
turbed or disarranged, and that the others who go to the front 
and do the fighting may help to pay for it after they return, 
home — if they do return home .? I| 

Keeping money in circulation. It seems to be assumed, on 
the other hand, that money possesses some inherent power of j 
production instead of being simply a medium of exchange. ' 

There is a story of a little girl who decided to spend her 
missionary money for ice cream in order that the ice-cream 
man might have money to give to the missionary cause. There 
are men who try to persuade us that we must do the same thing 
in order to raise money for a war. They tell us that unless we 
continue spending our money freely for unnecessary things, 
the sellers of these unnecessary things will not be able to buy 
liberty bonds or to pay war taxes. We are told by others that 
money must be kept in circulation ; otherwise our prosperity will 
be destroyed, and without prosperity we cannot finance a war. 



THE FINANCING OF A WAR 527 

Both these arguments attribute to money a productive power 
which it does not possess. To spend money for unnecessary 
things is to hire men to produce them. As fast as these men 
can be used in the industries made necessary by a war they 
are needed there. To keep them in the unnecessary industries 
is to interfere with the expansion of the necessary industries. 
Therefore it is pretty clear that during the continuance of a war, 
while men are badly needed in the necessary industries, it will 
be uneconomical and even criminal for private individuals to 
continue to spend money for unnecessary things. 

But, granting that it is important to keep money circulating, 
something depends upon the channels in which it circulates. 
The dollar which I spend for an unnecessary thing circulates, 
it is true ; but it is equally true that it circulates if I give it to 
the government, the Red Cross, or some other agency directly 
connected with the war, to be spent for some necessary thing. 
So far as mere circulation is concerned there is no appreciable 
difference between the two cases. But something else is in- 
volved besides mere circulation. The productive power which 
: produces the unnecessary thing is not so well employed, from 
the standpoint of national economy, as the productive power 
which produces the necessary thing. 

Granting also that it is important to give employment to men, 
something depends upon what they are employed to do. To 
spend a dollar on an unnecessary thing does, it is true, give 
employment to labor; but it is equally true that the same 
dollar spent for a necessary thing would employ the same 
amount of labor. The only question is whether it is better 
to have the labor employed in producing necessary things or 
unnecessary things. 

If '* Business as usual "merely means that we should go on 
doing precisely the same things in time of war as in time of 
peace, it is a palpable absurdity. If it means that everybody is 
to keep as busy as ever, or much busier than ever, it is good 
advice so far as it goes. What we really need to consider is. 



528 PRINCIPLES OF POLITICAL ECONOMY 

What shall we keep ourselves and others busy doing ? Shall we 
keep ourselves and them busy producing unnecessary things, 
or shall we do what we can to keep ourselves and them busy 
doing the necessary things ? Obviously the latter. '' Busier 
than ever " is a much better motto than '' Business as usual." 

The only way we can possibly keep everybody doing the 
necessary things in war time is, first, to do something ourselves 
which is necessary, and, second, to spend all our money for 
necessary things. If we have more money to spend than is 
sufficient to purchase necessary things for our own consump- 
tion, we can either spend the surplus for tools of production 
in some necessary industry (that is, we can invest it) or we 
can turn it over to the government, the Red Cross, or some 
other public agency. This agency can then spend it for much- 
needed things. 

By all means, therefore, let us keep money circulating in 
war time, not that this in itself means much, but because it 
gives direction to the real productive energy of the country. 
But let us see to it that every dollar which we put into circu- 
lation is put where it will do the most good, — where it will 
direct the productive energy of the country into the necessary 
rather than into the unnecessary industries. 



PART SEVEN 

REFORM 

Which has to do with various plans for the reorganization of 
industrial society 



529 



CHAPTER XLV 

COMMUNISM 

Compulsion versus freedom. The schemes for the improve- 
ment of social conditions fall into two general classes : first, 
those which rely upon the compulsory power either of a benevo- 
lent despot or of the mass over the individual ; and, second, 
those which rely upon voluntary work by individuals under the 
principle of free contract. Among those which rely upon the 
authority of the mass or group over the individual, commu- 
nism is the most extreme. It is sometimes called cooperation, 
but it is compulsory cooperation as distinguished from volun- 
tary cooperation. The compulsion is made complete by the 
fact that the community, or the group, owns all the property 
and the individual owns none. All the processes of production 
and distribution are carried on by the community as a whole 
rather than by individual initiative and voluntary agreements 
among individuals. 

Meaning of communism. Communism may therefore be 
defined as a type of social organization in which all wealth, in- 
cluding both producers' goods and consumers' goods, is owned 
and controlled by the community. It differs from socialism in 
that the latter proposes that the community shall own and 
operate only producers' goods, leaving the consumers' goods to 
be owned and enjoyed by individuals. A completely commu- 
nistic society, for example, would own the dwelling houses and 
even the food and clothing, but would distribute these to the 
individual members very much as they are now distributed 
within the small group which we call the family. From a cer- 
tain point of view we might say that the ideal family of to-day 
is a small communistic group in which all property is held in 

531 



532 PRINCIPLES OF POLITICAL ECONOMY 

common and enjoyed in common rather than separately by the 
individual members of the family. 

Relation to anarchism. Theoretically, communism would be 
at the opposite end of the scale from anarchism, which is an 
absence of all government, — at least the absence of all compul- 
sory government. In actual fact, however, it is not always easy 
to distinguish between a communist and an anarchist. As a 
matter of fact, there is a considerable group of individuals 
who call themselves communist-anarchists ; that is, they are 
opposed to any kind of government which resembles those with 
which we are now acquainted. They would substitute small 
communistic groups, each one working more or less independ- 
ently of the others, and make such voluntary arrangements 
for exchange of products as they might find to their mutual 
advantage. In so far as they would oppose all compulsion, 
they would be called anarchists ; in so far as they would have 
all wealth owned in common, at least within small groups, they 
would be called communists. Unless, however, the small 
group could exercise some compulsory control over the prop- 
erty of the group, it would be anarchism rather than commu- 
nism. If the group did exercise orderly control over its own 
property to the exclusion of individuals and of rival groups, 
it would be compelled to exercise compulsion and would 
therefore, to that extent, cease to be anarchistic and become 
purely communistic. 

Utopias. Naturally enough, communism has never been tried 
on a large scale. It has been advocated by many philosophers, 
both ancient and modern. Many pictures have been drawn 
of ideal societies in which communism was the outstanding 
feature. Plato, in his " Republic," pictured such an ideal com- 
monwealth ; not only was all wealth to be held in common, 
but wives and children likewise. Defective children, or chil- 
dren who seemed likely to be a burden rather than a help to 
the State, were to be disposed of in early infancy. Sir Thomas 
More, in his ''Utopia," presented another picture of an ideal 



COMMUNISM 533 

society based upon communism. In order to give an impres- 
sion of reality he pictured some travelers in South America 
Arho had discovered a new country, in which communism pre- 
^railed. Francis Bacon gave us a somewhat fragmentary picture 
3f his ideal of society in his ''New Atlantis." Tommaso 
ampanella, in ''The City of the Sun," and various other 
mters, have kept alive the ideal of a communistic society. 
[n more recent times we have such books as " News from 
Nowhere," by William Morris, "The Cooperative Common- 
kvealth in its Outlines," by Laurence Gronlund, and " Looking 
Backward," by Edward Bellamy. This is a list of distinguished 
ivriters, and their books make attractive reading. They show 
pretty clearly how persistently the world has dreamed of social 
:onditions in which there should be no rivalry of interests, 
no quarreling and bickerings over questions of property, — of 
mine and thine. 

It is not very difficult to show where these pictures are 
defective and how impractical such schemes of social organiza- 
tion are. The world at large, or at least a great majority of the 
people of the world, has put very little confidence in these pro- 
posals ; but probably no generation has been without a certain 
number of spirits who have retained their belief in those peculiar 
; ideals of justice and economy which these Utopian works have 
I set forth. 

Experiments. The primitive Christians. Nor have actual 
experiments been wanting. The primitive Christian Church is 
frequently referred to as an example of communism. One or 
two passages in The Acts of the Apostles indicate that the 
first Christians, at least, maintained a communistic fund for 
the maintenance of impecunious members. For a short time 
they appear to have put practically all of their possessions into 
a common fund. It will also be noticed that they not only 
put their possessions into a common fund, but they stopped 
working and remained together in one place, awaiting the 
second coming of the Lord. This makes it appear as though 
I 



534 PRINCIPLES OF POLITICAL ECONOMY 

communism were not with them an ideal scheme of social or- 
ganization but merely a convenient arrangement by means of ^ 
which they could live while preparing for the end of the world 
and their sudden translation to heaven. 

The Spartans. The Spartan commonwealth is likewise re- 
ferred to frequently as a communistic society. According to 
the account given in Plutarch's ''Life of Lycurgus," there 
were many communistic features about the life of the Spartans. 
It appears to have been the communism of a military camp, 
however, for the Spartans themselves were only a small clan, 
or caste, ruling over a much larger population of subject people. 
In order that they might be strong in a military sense, and 
hold the masses of the people in subjection, they organized 
themselves very much as a military camp has always been 
organized. There was no communism whatever for the mass 
of the people. It extended only to the small aristocratic and 
ruling class called Spartans. 

The monasteries. Most of the monasteries of the Middle 
Ages were organized on a communistic basis. They also prac- 
ticed celibacy, showing that they did not regard communism 
as the ideal basis of a continuing human society. The whole 
monastic life was organized for the purpose of promoting 
spirituality rather than for the purpose of reforming human 
society. 

The Taborites. Certain extreme sects among the early 
Protestants attempted some kind of communistic life without 
celibacy, but never made much of a success. Conspicuous 
among these were the Taborites, an extreme faction of the 
followers of John Huss, the Bohemian reformer. They with- 
drew from the city of Prague and started a community on a 
hill to which they gave the name Moimt Tabor. They hence 
became known as the Taborites. So long as they were thor- 
oughly united by their religious sentiments they worked very 
successfully, not only in productive industry but even in war, 
for the great Austrian Empire sent army after army against 



COMMUNISM 535 

them. They defeated the imperial armies because of the 
superiority of their organization. But eventually dissensions 
arose among them ; they were divided and overthrown, and 
their community was broken up. 

American experiments. America has been a fruitful field 
for the trying out of all sorts of experiments. Many of the first 
colonists came here because they were inspired by religious 
sentiments. They founded colonies where their religious ideas 
could flourish. This continent presented a virgin field where 
people with peculiar ideals of religious organization or of 
social economy could come and put their ideals to the test. " 

The outline on the following page gives a rough classifica- 
tion of the more important of these experiments. There were 
' many not included in this list, which were either unimportant 
las to numbers or so short-lived as to make them unworthy 
of mention. It will be noticed that the long-lived communi- 
ties were all religious in their nature. Of the nonreligious 
communities only one, namely, the Icarians, lasted a single 

■ generation, whereas several of the religious communities have 
: lasted half a century, and one group of communities, namely, 

■ the Shakers, has several colonies that have survived for more 
i than a century. 

Religious communities. Most of the religious communities, 
it will be noticed, are of foreign origin, and most of these are 
of German origin. The Shakers are placed among those of 

! American origin. As a religious sect the Shakers originated 
in England, but they made their experiments in communism 

I in this country. They have established numerous colonies from 
Maine to Kentucky. They are celibates, and therefore could 
have no continuing existence unless they continued to make 

! converts. This they have failed to do in recent years, and 
consequently the Shaker communities are dying out as the 
old people drop away. 

The Perfectionists originated in Vermont under the leader- 
ship of Mr. John Humphrey Noyes. They afterwards moved 



Religious 



Of Ameri- 
can origin 



American 

COMMU- ^ 
NISTIC 
SOCIETIESI 



Non- 
religious 



The Shakers (numerous colonies), Maine 

to Kentucky, 1787 
The Perfectionists of Oneida, N. Y., 

1848-1879 
Zion City, 111., 1890-96 
Jemima Wilkinson's New Jerusalem, 

N.Y., 1786-1820 
Celesta, Pa., 1852-1864 
Salem-on-Erie, N. Y., 1867- 
The Woman's Commonwealth, Texas 

and Washington, D. C, 1880- 
The Lord's Farm, N.J., 1877 
Shalam, or the Children's Land, N. M., 

1 884- 1 90 1 
Estero, Fla., 1904- 

The Christian Commonwealth, Ga., 1896- 
^ The House of David, Mich. (?) 

c Ephrata, Pa., 1732- 
The Harmonists, Pa., 1803- 
The Separatists of Zoar,Ohio, 1819-1898 
The Amana Society, Iowa, 1843- 
Of foreign The Bishop Hill Colony, 111., 1846-1862 
origin 1 The Bruederhof Communities, S. Dak., 
1862- 
The Waldensian Colonies, N. C. and 
Texas, 1893- 
^ St. Nazianz Colony, Wis., 1854 

fNew Harmony, Ind., 1825-1827 
' Owenistic \ Yellow Springs, Ohio, 1824 
[^Numerous others 

' Brook Farm, Mass., 1841-1847 
Fruitlands, Mass., 1843 
Hopedale, Mass., 1841-1858 
North American Phalanx, N.J., 1843-1856 
Wisconsin Phalanx, Wis., 1844-1850 
Northampton Association, Mass., 1842- 

1846 
Numerous others 

The fNauvoo, 111., 1849-1866 
Icarians ] Cheltenham, Mo., 1858-1864 
j^Icaria, Iowa, 1860-1895 

" Skaneateles Community,N.Y.,i844-i846 
Polish Colony, Anaheim, Cal., 1876-1878 
Topolobampo, Mexico, 1886-1901 
The Ruskin Commonwealth, Ga., 1896- 
Inde- j 1 90 1 
pendent The Cooperative Brotherhood, Wash., 
1898- 
Equality Colony, Wash., 1897- 
The Straight Edgers, N. Y., 1899- 
The Helicon Home, 1906-1907 



Fourieris- 
tic 



1 This outline is based on 
(Chicago, 1908). 



'American Communities," by W. A. Hinds 
536 



COMMUNISM 537 

to Oneida, New York. They have given up communism and 
have organized themselves in the form of a joint-stock society 
^nd are still prosperous and doing a thriving business. 

A multitude of other experiments of a more or less religious 
nature have been carried out by faith healers, adventists, and 
other people of rather extreme religious views. 

Of the religious communities of foreign origin, that at 
Ephrata, Pennsylvania, was the first to be organized on a dur- 
able basis in this country. Like the Shakers, they were celi- 
bates and were therefore doomed to ultimate extinction. 

One of the most successful of all these experiments was 
started in western Pennsylvania by some German pietists 
among the followers of one Georg Rapp, from whom they 
were given the name of Rappists. They afterwards moved to 
Indiana, where they sojourned for a time at New Harmony 
in the southwestern corner of the state. After a few years 
they sold out and moved back to Pennsylvania. Their colony, 
known as Economy, was a place for sightseers for many years. 

The Separatists of Zoar and the Amana Society were some- 
what similar in their origin and in their subsequent history. 
They did not practice celibacy. They prospered amazingly and 
presented a very attractive life as seen by visitors from the 
outside. They were animated by intense religious enthusiasm, 
and devotion to their own leaders. The Separatists of Zoar, 
however, gave up communism in 1898, largely because the 
younger generation had lost something of the religious zeal of 
the older generations, and decided that they preferred the indi- 
vidualistic type of life to the communistic. The Amana Society 
is still flourishing, and the people are apparently satisfied. 

The Bishop Hill Colony in Illinois was a Swedish colony ; 
its character and organization resembled most of the others. 
When they lost their intense religious zeal, they likewise lost 
their enthusiasm for the communistic type of life and gave it up. 
A series of communistic societies is still flourishing in South 
Dakota. They are known as the Brotherhood Societies. 



538 PRINCIPLES OF POLITICAL ECONOMY 

Several communities of North Italian Protestants have 
flourished in the South, particularly in Valdese, North Carolina, 
and near Gainesville, Texas. 

Nonreligious communities. In 1822 Robert Owen, a great 
English philanthropist and a firm believer in what was then 
called socialism, came to America for the purpose of estabUsh- 
ing an ideal community. He delivered many addresses and 
created much enthusiasm. In looking about for a location he 
found that the Harmonists, who were then living in New 
Harmony, Indiana, were desirous of selling out and moving 
back to Pennsylvania. He bought all their real estate and pro- 
ceeded to establish a colony of his own. He was a man of 
great ability, who had made a fortune of his own, which he 
devoted liberally to the propagation of his ideas. His colony, 
however, was made up of idealists who were more in the habit 
of talking about their theories of society than of working 
to produce wealth ; it was a good illustration of the inability 
of any community to live on talk. It lasted a little over two 
years. Numerous other experiments of the same kind were 
tried, none of which lasted for a single year. One at Yellow 
Springs, Ohio, lasted for several months. 

About 1 84 1 the works of a French communist, Fourier, 
were translated and published in this country. They created 
great enthusiasm, and a large number of experiments were 
made. The most notable of these was Brook Farm, Massachu- 
setts, which was started independently but afterward adopted the 
plan of Fourier. This experiment was notable mainly because 
of the great names in its list of members. Some of the most 
distinguished men and women of that day, in letters and in 
scholarship, joined the Brook Farm community. The most 
successful of the Fourier experiments, however, was the North 
American Phalanx in New Jersey. It lasted for thirteen years. 
An experiment at Hopedale, Massachusetts, was only partially 
communistic ; it lasted seventeen years and then became a 
joint-stock association. 



COMMUNISM 539 

As indicated above, the most successful of all the nonreli- 
gious communities in this country was the Icarian community 
in Iowa. They were followers of Etienne Cabet, a French 
communist, who wrote a very attractive book entitled '' A 
Voyage in Icaria." It awoke the slumbering idealism of many 
French people who desired to form a commonwealth after the 
description of the life of the Icarians. Cabet led his followers 
to this country and landed in New Orleans, hoping to estab- 
lish them in northeastern Texas. The land proved to be in- 
accessible and the climate not very agreeable. They returned 
to New Orleans discouraged, but learned that the Mormons 
had recently been driven out of Nauvoo, Illinois. They pro- 
ceeded by boat to Nauvoo and established themselves, finding 
plenty of vacant houses and factory buildings. Here they 
prospered for a number of years, but they wished to find a situ- 
ation where they could be more to themselves, and a tract of 
land was bought in southwestern Iowa, not very far from the 
present tow^n of Corning. There they lived under the com- 
munistic system until 1895, when they gave up communism 
and came over to an individualistic regime. 

A large number of other societies have been established, 
by the followers both of Robert Owen and of Fourier, and 
in recent years by the admirers of Laurence Gronlund and 
Edward Bellamy. 

Results. It may seem as though the experiences of these 
numerous communistic societies tended to throw discredit upon 
all communistic ideals. The advocates of communism, how- 
ever, insist that the principles of communism are still sound, 
even though a thousand communities fail. To an impartial 
observer it looks as though communism might work very well 
if people were built on a communistic plan. If they have a 
passion for communism, or a powerful religious emotion which 
will overcome their individualistic and particularistic tendencies, 
they may live together peaceably under communism. Unless 
they are inspired with religious zeal or a genuine passion for 



540 PRINCIPLES OF POLITICAL ECONOMY 

communism, it seems as though the natural individuality, not 
to say the contrariness, of human nature would continue to 
break up all communistic societies in the future as it has in 
the past. 

But why, it may be asked, will not communism work in a 
large national group as it now works in a small family group ? 
It does not seem to work particularly well in some families. 
In those few abnormal cases where the members of the family 
have no particular affection for one another, the question of 
the division of the family funds is a difficult one. If the father 
is selfish and cares nothing for the others, he becomes an 
autocrat and spends all or the greater part of his income 
upon himself. If the others feel the same way toward him 
and one another, they quarrel among themselves. But in a 
normal case, where an intense affection for one another pre- 
vails, there is no quarreling and everything is shared in 
common. 

If it were possible for the members of a large national 
group to feel toward one another as the members of a normal 
family feel, communism or almost any other system might 
work well. But the average man's capacity for affection is 
limited. It would take one with a genius for friendship to 
feel a warm affection for even a hundred separate individuals, 
to say nothing of a hundred million. It would be practically 
impossible for any of us to feel toward each and every one of 
a hundred million people, only a few of whom we had ever 
seen, precisely as we do toward our own brothers and sisters, 
fathers and mothers, and other very near relatives. This is 
sufficient reason why communism cannot be made to work well. 



CHAPTER XLVI 

SOCIALISM 

Socialism and communism have shifted meanings. The term 
socialism has a variety of meanings, though there are certain 
elements common to every definition. During the last seventy- 
five years the meanings attached to socialism and communism 
have been shifted. That which is now known as socialism 
was formerly known as communism. Karl Marx, who is re- 
garded as the great apostle of modern socialism, called himself 
a communist. On the other hand, socialism was applied to 
general schemes for social amelioration which did not involve 
any fundamental change in the organization of society. Com- 
munism, however, fell into disrepute, and its followers discarded 
the name and began calling themselves socialists. 

There is a tendency on the part of partisans of any pro- 
gram or movement to define their program in the most 
favorable terms possible. This applies to socialists as well as 
to other propagandists. Sometimes this tendency leads to a 
definition of socialism which does not define, but which includes 
the opponents as well as the proponents of socialism. When it 
is said, for example, that socialism teaches the doctrine that only 
he who produces shall consume, it may be replied, '' So also 
does individualism," and practically every other ism that has 
anything to do with the production and distribution of wealth. 
When it is said that socialism teaches the doctrine of equality 
of opportunity, it may be replied, ''So also does individualism," 
and all the- other isms. 

The difference between a socialist and a nonsocialist. In 
order to define socialism we must find something which will 
completely distinguish the socialist from the nonsocialist. The 

541 



542 PRINCIPLES OF POLITICAL ECONOMY 

only definition that will do this is the following : A socialist 
is one who believes that the community, the public, or the gov- 
ernment should own and operate the means of production, 
leaving to individuals the ownership of most articles of con- 
sumption. By the means of production are meant practically 
all that is included under the names land and capital^ — farms, 
factories, railroads, mercantile houses, and office buildings 
would all be included ; under the program of socialism all 
these things would be owned and operated by the community, 
the public, or the government. This would mean that almost 
every individual would be in the employ of the government 
in one way or another. Since there would be no private enter- 
prise, no one could start a farm, a factory, a store, or any busi- 
ness enterprise of his own. Since no one could start any such 
enterprise, no one could be employed by a private employer. 
Since no one could be either in his own employ or in the em- 
ploy of any private organization, almost everyone would have 
to be in the employ of the government. 

There is some difference of opinion among socialists as to 
how far this principle of government ownership and operation 
should extend. Some are willing to stop with trusts and mo- 
nopolies. This, however, is populism rather than socialism. It 
is based not on a theory of capital but on a theory of monopoly. 
Many people who favor the private ownership of capital are 
opposed to monopoly and believe that the best way to curb 
monopoly is to turn all monopolistic enterprises over to the 
state. Such a person might utterly reject all socialistic theories 
respecting capital. Moreover, every thoroughgoing socialist 
really bases his conclusions on his theory of capital. The work 
of Karl Marx, on '' Capital," has been called the Bible of the 
modern socialist. This book pays very little attention to the 
question of monopoly ; it consists almost entirely of an analysis 
of capital and capitalistic production. From Marx's point of 
view it is not monopolized capital, but capital as such, that 
gives its owner the power to exploit and defraud other 



SOCIALISM 543 

people. The capital belonging to a farmer as well as that 
belonging to a great trust, to a small manufacturer as well as 
to a large manufacturer, to the driver of a jitney bus as 
well as to a street-car company, is to be owned and operated 
by the public. 

Socialism is not populism. On the other hand, the slogan 
" Let the nation own the trusts " has nothing to do with capital 
as such. Such a program is based entirely on a theory of 
monopoly, which is the essence of populism rather than of 
socialism. Those who hold to this doctrine may quite consist- 
ently hold to the idea that capital which is not monopolized is 
a help rather than a hindrance to labor, that he who accumu- 
lates capital by consuming less than his income is benefiting 
rather than injuring labor, and that therefore everybody ought 
to be encouraged to accumulate capital and invest it in produc- 
tive enterprises. From this point of view the individual who has 
accumulated capital and invested it in a productive enterprise 
has not only increased the productivity of the community but 
is entitled to some reward for that service which he has per- 
formed. This reward would be called interest. The populist, 
therefore, would approve of the receipt of interest on the part 
of the owner of unmonopolized capital. 

All the great authoritative books on socialism are funda- 
mentally opposed to interest or to anyone's receiving any 
income in the form of interest. If labor is the only pro- 
ducer of wealth, the saver and accumulator is not a producer 
and is therefore not entitled to any share in the product. Since 
interest is the share which goes to the accumulator and inves- 
tor, it cannot be justified under the socialistic philosophy. 

Difference between a socialist and a liberalist. The defini- 
tion of a socialist as one who believes in the common, public, 
or government ownership of all the means of production sepa- 
rates the socialist not only from the populist and the commu- 
nist but from the liberalist as well. Moreover, this is the only 
definition which will at all distinguish the socialist from the 



544 PRINCIPLES OF POLITICAL ECONOMY 

liberalist. The liberalist is quite as desirous of economic justice 
and of equality of opportunity as the sociaHst is, but he beUeves 
that the hberahstic program is better adapted to the securing of 
those ends than the sociahstic program. The Hberahstic pro- 
gram permits the private ownership of capital, and it also per- 
mits the receipt of interest as a private reward, on the ground 
that the accumulation of capital is a productive service, — not 
that it is philanthropic, but that it is useful to society. 

In order to becloud the issue it is sometimes stated that the 
socialist believes that men should be paid for doing things and 
the liberalist that men should be paid for owning things. The 
liberalist does not believe that men should be paid for owning 
things, unless the ownership is a symptom of their having done 
something which was useful. If two men, A and B, have been 
doing equally good work with their hands and their heads, and 
have earned equal incomes, they should be paid the same, accord- 
ing to the liberalist as well as the socialist. If, however, A 
consumes all his income, but B invests a part of his in the 
tools of production, the liberalist believes that B has done better 
than A. If everybody did as A does, the nation's stock of tools 
would never increase ; if everybody did as B does, the nation's 
stock of tools would increase rapidly. The more citizens it has 
of the B type, the more prosperous will the nation become ; the 
more it has of the A type, the less prosperous it will become. 
It is very important that men should be encouraged to join the 
ranks of the B's rather than of the A's. The liberalist there- 
fore holds that there should be some inducement to men to do 
what B has done ; namely, to invest a part of their income rather 
than to consume it. 

In the smartness of debate one might still say that B was 
thereafter being paid for owning something, whereas A was 
paid only for doing something ; but as a matter of fact that 
which B appears to be paid for owning is only a deferred pay- 
ment for that which he did before. When he refrained from 
using up his income in riotous living and devoted it to a useful 



SOCIALISM 545 

purpose he postponed the day of his enjoyment of his in- 
come. It is virtually, therefore, deferred payment for his work. 
The money which he received for his work was not final pay- 
ment ; the final reward of every individual is that which he 
consumes. When B decided to defer consumption, he was 
really deferring the receipt of his wages. 

There is no other definition of socialist or socialism which 
will separate the socialist from the nonsocialist, or which will 
particularly separate him from the liberalist. The term liberalist 
is justified because the liberalist believes that, as far as possible, 
each individual should be at liberty to start his own enterprise 
if he is so disposed or to work for someone else if he prefers, 
— that he should be at liberty to work for private individuals or 
to work for the government, according as he can make the most 
satisfactory voluntary agreements. In short, the liberalist is 
willing to trust men with the power of free contract, whereas 
the socialist relies mainly on the government's power of 
compulsion. 

Socialism involves more use of the government's power of 
compulsion than liberalism does. It has been said that the 
power to tax is the only capital the government needs. But 
the power to tax is compulsion. In order to carry out a social- 
ist program the public would have to use its power of com- 
pulsion in many ways. It would have to prohibit competition 
by private individuals against the state as it now forbids pri- 
vate individuals to compete with the post office in the carrying 
of first-class mail. It would have to use its taxing power to 
compel the payment of deficits whenever deficits occurred. 
The liberalist, on the other hand, proposes to reduce to a 
minimum the compulsion of the government over the indi- 
vidual. An industry which cannot be carried on without 
any compulsion whatsoever had probably better be left to 
die, unless it be one which is necessary for military pro- 
tection. If an individual who desires to manufacture shoes 
cannot manufacture them successfully without the power of 



546 PRINCIPLES OF POLITICAL ECONOMY 

compulsion, he should not manufacture them at all. If he can 
buy his raw materials on the open market and hire his labor 
on the open market and sell his product on the open market, 
making use everywhere of voluntary exchange and voluntary 
agreement, and can manage to make a profit out of his busi- 
ness, he is entitled to remain in business. It shows that he 
is efficient enough to assemble the various factors of production 
in such a way as to produce an article which is worth more 
than the cost of those factors of production. This is highly 
economical. If, in order to make a living, he had to be paid 
out of the public treasury, and the public had to make use of 
its power of taxation in order to get the wherewithal to pay 
his salary, there is a strong probability that the product would 
not be worth as much as the factors which entered into it. 
In that case the power to tax would have to be made use of 
to keep the business going ; but the fact that compulsion was 
necessary would be proof that it ought not to be used, but that 
the business should die a natural death. 

Where there is no free bargain and sale, — where consumers 
are not at liberty to turn from one producer to another and 
buy whatever suits them best, where the producers of raw ma- 
terial are not at liberty to sell to any manufacturer who will pay 
them the highest price, and where labor is likewise not free to 
bargain to its own advantage, — there is no assurance that the 
maximum economy will be secured. 

Compulsion sometimes necessary. It is not to be inferred, 
however, that the liberalist is an anarchist and therefore op- 
posed to all exercise of compulsion or governmental power. 
He is one who believes that a great many lines of pro- 
duction can be safely and successfully carried on without 
the use of compulsion, under voluntary agreements, free con- 
tract and sale, and individual initiative. He also quite frankly 
recognizes that there are many things which cannot be done 
in this way. For example, the forestation of certain moun- 
tain slopes would be undertaken by private enterprise only 



SOCIALISM 547 

when the enterprisers thought that it would be profitable 
to them. But, although it might be unprofitable when con- 
sidered by itself, it might still be highly profitable when 
considered from the viewpoint of the nation as a whole. If 
the deforestation of high mountain slopes results in the over- 
flow of streams and the destruction of valuable land along the 
lower watercourses, this is a matter which affects the country 
as a whole but might not interest the individual owners of 
the high slopes. If they found it profitable to cut off the 
timber and sell it, they would do so even though property of 
much greater value a few hundred miles away on the river 
bottoms were destroyed. Here would be a clear case where 
government enterprise would be superior to private enterprise. 
But similar reasoning would in some cases prove the superiority 
of international enterprise over government enterprise. It might 
very well happen that the high mountain slopes were within 
the territory of one nation, and the river bottoms in the terri- 
tory of another. In that case the nation owning the high 
mountain slopes would have no interest in protecting the 
river bottoms. Nothing but an international arrangement could 
solve that problem. 

Again, take such an enterprise as the building of light- 
houses. The private individual who built a lighthouse on a 
rocky coast would scarcely be able to collect toll or to get 
payment for the utility which he was furnishing. Not having 
the power of compulsion, he could not force mariners to pay, nor 
could he tax the public at large in order to build and maintain 
lighthouses. The public alone has this power of compulsory 
collection. In any other case (and there are many of them) 
where it can be shown that freedom of contract will not suc- 
ceed in getting an important work done or an important utility 
produced, the liberalist is willing to see compulsion used. 

Socialism, like vegetarianism, is an exclusive term. Liber- 
alism is therefore not an exclusive term, as socialism seems 
to be. In this respect socialism is like vegetarianism ^ud 



548 PRINCIPLES OF POLITICAL ECONOMY 

certain other exclusive terms. One is not a vegetarian by 
virtue of the fact that one sometimes eats vegetable food ; 
one is a vegetarian only when one refuses to eat anything 
else. A liberalist with respect to food is willing to eat any 
kind which seems to him to be desirable. In a similar sense, 
one is not a socialist by virtue of the fact that one is willing 
that the government should do some things ; one is a socialist 
only when one believes that private individuals should not 
carry on any productive industry or own any productive capital. 
The liberalist is willing that industry shall be carried on in 
any way that seems to promise desirable results. If an indi- 
vidual farmer can grow corn successfully, the liberalist is will- 
ing that he shall do so and make a profit out of it ; if the 
individual manufacturer can manufacture successfully, the liberal- 
ist is willing that he shall do so and likewise make a profit ; 
and so on. He perhaps goes a step farther and believes that 
preference should be given to free and voluntary business 
arrangements rather than to compulsion, and that compulsion 
should be used only when the voluntary system fails to get 
desirable things done. 

Criticism always easy. As to the merits of the socialistic 
program as compared with other programs, there will always 
be considerable differences of opinion. It is not difficult to 
point out with a great deal of particularity the evils that re- 
sult from a liberalistic policy. The unfortunate condition of 
those people who are not in a position to contract to their 
own advantage is perhaps the strongest argument used by 
the present-day socialists. It is very easy to find many com- 
munities in which certain classes of laboring men find it 
impossible to get good wages by the method of voluntary 
agreement, whereas other people who use this method get 
larger incomes than are necessary or desirable. This obser- 
vation, however, is not confined to labor. Anyone who is try- 
ing to sell something with which the market is oversupplied 
is in a more or less helpless position. When more is offered 



SOCIALISM 549 

for sale than buyers care to buy, the seller is very dependent, 
whereas the buyer is independent. Under the system of volun- 
tary agreement the seller must take what he can persuade the 
buyer to pay, and the buyer can take his choice. If, however, 
you reverse the conditions, you find buyers who want to buy 
more than sellers are willing to sell. Then buyers are very de- 
pendent ; they must take whatever they can persuade the sellers 
to sell, whereas sellers are independent and can take their choice. 
It happens that certain kinds of labor seem almost chroni- 
cally to be in this position of dependence. They always, and 
rightly, evoke sympathy. There are two ways, however, of 
correcting the difficulty. One is to substitute the system of 
compulsion for the system of voluntary agreement ; the other 
is to make that kind of labor scarce and hard to find. Seeing 
that these unskilled laborers are now beaten under the system 
of voluntary agreement, it looks rather obvious to some people 
that something else must be substituted. But the liberalists 
maintain that labor is not necessarily, and not always, at a dis- 
advantage under the system of voluntary agreement. If you can 
redistribute the labor supply so that there will not be too much of 
one kind in proportion to the other factors, then the laborers will 
be in a position of great independence. It is not difficult to point 
out instances where the laborer is independent and the cap- 
italist dependent, — where the preservation of the capitalist's 
property — where even his income itself — depends on getting 
labor when there is not enough labor to go around. In such 
cases the capitalist must take whatever labor is offered, whereas 
the laborer can take his choice of employers. There need not 
be the slightest difficulty in creating such conditions for labor 
in general ; but it will require the following of a program 
radically different from that of the socialist. It looks much 
easier merely to exercise the compulsory power of the state 
and cure the difficulty at one stroke. Not many difficulties, 
however, are permanently cured at one stroke or by the 
exercise of compulsion. 



550 PRINCIPLES OF POLITICAL ECONOMY 

"Why there are socialists. When the victim of a wasting 
sickness goes to a physician for help, he is very Hkely to be 
disappointed. The physician, if he is scientific and therefore 
honest, can seldom promise him a definite cure. Being a 
scientific man he can point out the causes which produce the 
illness, and say that if at some time in the past the patient 
had pursued different habits, he would not have become ill. 
This, however, is cold comfort to the sick man who is suffer- . 
ing intense pain. Or the physician may prescribe a course 
of treatment which, if rigidly followed for a period of time, 
will tend to remove the causes of the illness and eventually 
improve the patient's condition. This likewise is cold comfort 
to the man in pain, who wants immediate relief. Such a man 
is in a good frame of mind to lend a favorable ear to the 
" doctor " with a specific remedy who promises him a specific 
cure. This is why a certain type of unscientific practitioner, 
commonly called a quack, flourishes. I 

Similarly, the man who is in the grip of poverty, as well as 
his sympathizers, is likely to be disappointed with the pro- 
gram of the economist. The economist, if he is a scientific 
man and therefore honest, will be compelled to say that there 
is no immediate relief which is not likely to produce worse 
results in the future. Being a scientific man, he can point out 
the conditions which tend to induce poverty, and can prescribe 
policies which, if they had been pursued consistently for a 
number of years, would have prevented the poverty which now 
exists. This is cold comfort to the man who is already 
suffering from poverty and longing for relief. Such a man 
is in a condition to lend a favorable ear to the doctor with a 
specific remedy. The obvious and specific remedy which is 
commonly used is the compulsory power of the state or of the 
mass over the individual. This is sometimes called democratic, 
but there is nothing particularly democratic in compulsion. 
One of the most democratic things in the world is freedom of 
contract, — freedom on the part of the individual to pursue 



SOCIALISM 551 

his own interests so long as they happen to coincide with 
those of the pubHc. 

There is a close parallelism between the condition of the 
laborer on the oversupplied labor market and the condition of 
the producer of vendible commodities on an oversupplied 
commodity market. In the early nineties of the last century, 
farm products were greatly oversupplied. There had been a 
rapid settlement of the fertile prairies of the West and a 
rapid increase in the tillable area on all the farms. The result 
was that a great flood of agricultural products was poured 
upon the markets of the world, depressing prices not only 
in this country but in Europe as well. In that situation the 
farmers were in a dependent condition. They had much to sell 
and there were apparently few buyers, — few at least relatively 
to the amount of produce that was offered. The average farmer 
had to take what he could get. Naturally enough this situa- 
tion created dissatisfaction, and demands were made by the 
agricultural classes of the South and West for some kind of 
compulsory action by the government. On the basis of free 
contract they were at a great disadvantage, and not unnat- 
urally desired to use some other method, for the time being 
at least. Freedom, to them, frequently meant freedom to 
become bankrupt and to go hungry. 

At the time of the present writing (1918) the conditions 
are reversed and the boot is on the other foot. The world is 
experiencing a great shortage of agricultural products. Buyers 
are everywhere asking for products, and there appear to be few 
sellers, — few at least relatively to the number of buyers and con- 
sumers. The consumers are now in a position of great depend- 
ence, but the farmers are in a position of great independence. 
On the basis of free contract the farmer has the advantage and 
the consumer the disadvantage. The farmer is not now calling 
for a limitation upon the right of contract. He is not demand- 
ing the substitution of compulsion for freedom. There are 
demands, however, on the part of consumers for government 



552 PRINCIPLES OF POLITICAL ECONOMY 

action in the fixing of prices and the control of marketings 
processes. Since he is at a disadvantage in the bargaining 
process, the consumer feels that something else should be sub- 
stituted. Freedom to buy food does not seem so very precious. 
Farmers, however, are inclined to protest against the substi- 
tution of compulsion for bargaining ; that is, the substitution of 
price-fixing by the government for the policy of letting demand 
and supply determine the price. 

There was a time in England, following the Black Death, 
when labor seemed to be abnormally scarce as compared with 
what had been known for centuries. The laborer was able to 
bargain to good advantage. He did not then demand anything 
better than free contract in the determination of wages. The 
demand for compulsion, however, came from the landowners 
and employing classes, and much severe legislation was passed 
fixing wages and punishing attempts on the part of laborers 
to bargain for higher wages. 

Generally speaking, however, in the history of the greater 
part of the world, conditions have been such that laborers 
rather than employers have been at a disadvantage in bargain- 
ing. Unskilled laborers have generally been abundant. It has 
seldom been necessary for an employer to spend much time 
searching for men who were willing to work for him. The 
searching has been on the other side. Labor being thus almost 
permanently oversupplied, it has led to a great many demands 
for the substitution of compulsion for free bargaining as a 
means of fixing wages. 

Now it is not necessary to have a scourge in order to thin 
out the ranks of unskilled labor. The case of the Black 
Death was cited merely because governments have generally 
been so stupid as to do nothing about it, and here was one 
case where a scourge proved to be in some respects more 
intelligent and generous than governments have been. It is 
quite possible, by the use of a little intelligence and progres- 
siveness, to create conditions under which the demand for labor 



SOCIALISM 553 

will continually expand and the supply of unskilled labor 
continually contract, putting the unskilled labor in a continu- 
ally improving situation with respect to the bargaining process, 
making it continually easier for the laborer to find a job at 
remunerative wages but, as a necessary consequence, continu- 
ally more difficult for the employer to find unskilled labor at 
low wages. By this process the system of free contract could 
be preserved and labor could be made independent and pros- 
perous at the same time. 

If this were done, in all probability the demand for com- 
pulsion would again come from the employing classes. Find- 
ing themselves at a disadvantage in the bargaining process, 
they would seek government aid in the fixation of wages by 
compulsion. That evil, however, could be combated when 
it arose. 

Libertarians and compulsorians. The reformers of our sys- 
tem of distribution may therefore be grouped into two main 
classes, — the compulsorians and the libertarians. The com- 
pulsorians are those who wish to substitute some form of com- 
pulsion for the system of free trade. The libertarians are those 
who prefer to keep the system of free and voluntary agree- 
ment rather than resort to compulsion. They rely upon free 
initiative, not only in getting things produced but in deter- 
mining the shares in distribution. Further, the compulsorians 
may be subdivided into two classes : first, those who believe 
in a benevolent despotism, such as that which produced most 
admirable results in the Canal Zone during the building of the 
Panama Canal, or that which prevails to a less degree in the 
German Empire ; and, second, those who believe in the author- 
ity of the mass over the individual, where the will of the mass 
is indicated by majority votes and by the election of popu- 
lar individuals as directors and administrators. The libertarians 
are likewise divided into groups : first, those who believe that 
I there is a logical dividing line between the sphere of govern- 
ment action which must always be compulsory and the sphere 



554 PRINCIPLES OF POLITICAL ECONOMY 

of private enterprise which must always be voluntary and o: 
a free contractual basis ; second, the extreme anarchists who" 
do not believe in force or compulsion of any kind, not even 
the exercise of police power, much less of military power. 

The real conflict between compulsorians and libertarians h 
between the two intermediate groups, namely, those who believe 
in the compulsion of a democratic mass over the individual 
and those who believe in a fairly definite dividing line between 
the sphere of compulsion and the sphere of freedom ; in other 
words, it is the conflict between socialism and liberalism as 
we find it in the world to-day. 



CHAPTER XLVII 

ANARCHISM 

Anarchism and socialism. In some respects anarchism is 
ithe diametric opposite of sociaHsm ; in other respects it is some- 
jwhat similar to sociahsm. They represent opposite tendencies 
I in that the sociahst proposes to enlarge the power and function 
either of the state or of some kind of public organization, 
whereas the anarchist proposes to eliminate all authority, or 
all control of one person by another. Such organization as 
shall exist under anarchism shall be purely voluntary. Volun- 
jtary groups may be formed as large or as small as the indi- 
vidual members care to have them." The relations of one 
group to another shall likewise be on a purely voluntary or 
; contractual basis. There shall be no state with a military arm 
ior with police power of any kind. 

Anarchism and socialism resemble each other in that both 
revolt, either in part or in whole, against any system which 
gives one man power or authority over another. Many of 
the advocates of socialism object to private capital primarily 
on the ground that it gives one man, namely, the capitalist 
employer, power and authority over another man, the property- 
less laborer. The anarchist says, regarding this opinion : It 
is good so far as it goes. We anarchists are likewise opposed 
to giving one man power or authority over another. The 
private ownership of capital does what the socialist says it does, 
and that is wrong. We are therefore opposed to the private 
ownership of capital. But capital is not the only source of 
authority. The government likewise gives one man power or 
authority over another; the capitalist employer does not in 
fact have as much power or authority as a judge or a policeman, 

555 



556 PRINCIPLES OF POLITICAL ECONOMY 

a governor or a president. The socialist, therefore, is only 
halfway anarchist. He is opposed to one source of power anc 
authority ; we are opposed to both sources. 

May government eventually become unnecessary ? Th( 
underlying philosophy of anarchism is of various kinds. There! 
is one system of thought which is frequently but improperly] 
called anarchistic. It is held by certain people that government 
and compulsion are made necessary by the imperfections in 
human nature, — that if we were so highly developed morally 
that each individual would voluntarily do what he ought 
to do or what was in the public interest, then it would 
not be necessary to use authority or compulsion on anybody ; 
but since there are individuals with undeveloped moral natures, 
— individuals who do not voluntarily and automatically respond 
to the needs of society, — it is therefore necessary that they be 
compelled to do what they ought to do, or (which is the 
same thing) what they would do if they were fully developed. 

In the closing paragraphs of his monumental work on 
sociology, which was in turn the culmination of his great system 
of synthetic philosophy, Herbert Spencer^ sums up his ideas 
as to the ultimate end of all social progress in the following 
eloquent words : 

But if the process of evolution which, unceasing throughout past time, 
has brought life to its present height, continues throughout the future, as 
we cannot but anticipate, then, amid all the rhythmical changes in each 
society, amid all the lives and deaths of nations, amid all the supplantings 
of race by race, there will go on that adaptation of human nature to the 
social state which began when savages first gathered together into hordes 
for mutual defence — an adaptation finally complete. . . . 

On the one hand, by continual repression of aggressive instincts and 
exercise of feelings which prompt ministration to public welfare, and on the 
other hand by the lapse of restraints, gradually becoming less necessary, 
there must be produced a kind of man so constituted that while fulfilling 
his own desires he fulfils also the social needs. . . . 

1 The Principles of Sociology, second edition, Vol. Ill, pp. 598-601. 
London, 1897. 



ANARCHISM 557 

Long studies . . . have not caused me to recede from the belief expressed 
nearly fifty years ago that — " the ultimate man will be one whose private 
requirements coincide with the public ones. He will be that manner of 
man who, in spontaneously fulfilling his own nature, incidentally performs 
the functions of a social unit ; and yet is only enabled so to fulfil his own 
nature by all the others doing the like." 

Whether this delectable state is to be reached by the slow 
and somewhat cruel process of evolution, as Spencer believes, 
or by the process of moral reform and religious evangelism 
may be open to speculation. There are probably not many 
people who would disagree with the general conclusion that 
government would be unnecessary in either case. '' If " (but 
this is a large if) human nature could be so perfected, either 
by the slow elimination of the unsocial and the antisocial (that 
is, the criminal and the immoral) or by their moral regeneration, 
it might very easily follow that government would ultimately be- 
come unnecessary, or at least that compulsion by governmental 
authority would become a thing of the past. This position, how- 
ever, can hardly be called anarchistic in any real sense, for the 
real anarchist believes, not that government may ultimately 
become unnecessary, but that it is now unnecessary. 

Impatience of restraint. There is another type of thought, 
sometimes characterized as anarchistic, which does not revolt 
so much against government and the use of compulsion in the 
form of police power as against what is called moral compul- 
sion ; that is, the setting up by society, or by people in 
authority, of standards which others are bound to follow. It is 
proposed, therefore, that we throw off the so-called shackles 
of conventionality and even of morality, and that everyone 
do that which is right in his own eyes, regardless of what 
may be said by other people or by institutions and organizations 
which pretend to tell us what we ought to do. 

Is morality an invention of weaklings to curb the strong ? 
Among the people who take this point of view, however, two 
diametrically opposite conclusions are reached, There is one 



558 PRINCIPLES OF POLITICAL ECONOMY 

school represented by such writers as Kaspar Schmidt and 
Friedrich Nietzsche, who hold that religion and morality are 
the inventions of the weaklings of the world for the purpose 
of holding the strong in check. There is an old fable regard- 
ing the mice who found themselves oppressed by the cat. 
They voted unanimously that the cat should wear a bell in 
order that the mice might be protected. According to these 
writers religion and morality are merely different ways by 
which mice try to put the bell on the cat. They try to make 
it unpopular for the strong man to use his strength. They 
persuade him that it is immoral or irreligious, or that the 
vengeance of supernatural agencies will be let loose upon him 
if he exercises his strength to the detriment of the masses. 
Therefore the strong man, sometimes called the superman, 
should break loose from these conventionalities, should snap 
the cords with which the Lilliputians have bound him, and 
should dare to be great and independent, and impose his will 
on the masses if he is able to do so. 

Is morality an invention of those in power to curb the 
masses? The other school of anarchists, and certain socialists 
who are anarchistic in spirit if not in program, assert that 
religion and morality are the cunning inventions of priests and 
soldiers and capitalists who hold the masses in check ; that, for 
the average man, to be good is merely to be good for some- 
body else, that is, for those in power, — that to be good is to 
support the priest or the capitalist or the policeman or the 
judge or someone in authority ; that to be free is to be good 
to one's self. 

As to which of these two conclusions is the more absurd, 
it would be difficult to decide. They are mentioned to show 
to what extremes of aberration the human mind is capable of 
going. One doctrine would lead the strong man to do as he 
pleased, to impose his will upon his neighbors either by the 
weight of his fist or by his superior power of destruction in 
some other form ; the other conclusion would lead the masses of 



ANARCHISM 559 

the people to sink into a state of license and violence which 
would destroy civilization and land us in a sort of primeval 
social chaos. 

Are all human interests harmonious? There is, however, 
another system of thought which is truly anarchistic and less 
repulsive than either of these. This system is based on the 
fundamental assumption that all human interests are harmonious. 
In this best of all possible worlds, it is claimed, there can 
be no such thing as a conflict of human interests ; it is in 
some way a reflection upon the Creator of the world to say 
that there could be anything but a harmony of real interests 
among men ; it cannot possibly be true that one man's meat 
is another man's poison ; these apparent conflicts are the 
creation of men and human institutions and are not inherent 
in the nature of man and the universe. 

This underlying assumption sounds attractive, and doubtless 
many of us would like to believe it if we could. There are, 
however, so many hard facts in the way that not many of us 
are able to bring ourselves to the point of ignoring the very 
present and prevalent conflict of interests. It was shown in 
the chapter on Scarcity that the mere fact of a congestion of 
population — of too many people trying to live in one spot — 
creates in that spot a state of scarcity. Food enough in that 
particular spot cannot be produced for as many people as 
would like to live there. This situation in itself inevitably 
and necessarily produces a conflict of interests. Either some 
people must move to another spot or food must be brought 
from other spots to feed the people who are there. Either 
alternative will prove disagreeable to somebody. If neither of 
these alternatives is chosen, then there must be hunger ; more 
than one' person will be wanting each parcel of food, and that 
in itself is a conflict of interests. Here are certain facts of a 
physical nature which cannot by any effort of the will or the 
imagination be conjured out of existence. There is, in fact, a 
conflict of interests wherever two people want the same thing. 



S6o PRINCIPLES OF POLITICAL ECONOMY 

Conflict of interests makes control necessary. Wherever 
there is a conflict of interests, one of two things is absolutely 
necessary : either the individuals must have a high moral 
development, which will lead each one to surrender certain 
interests in favor of others, or there must be an umpire to 
decide between them and enforce his decision. This umpire, 
by whatever name he may be called, exercises the function of 
government. In fact, this umpire is government, whether it be 
an individual or a great organization of individuals exercising 
Various functions, such as legislation, administration, interpre- 
tation, enforcement, and so on. 

Emotional anarchism. There is another type of anarchism 
which can scarcely be said to have any underlying philosophy. 
It is based wholly on feeling and sentiment. Doubtless every 
human being possesses some repugnance toward being ruled, 
or being compelled to do that which he dislikes to do, or to 
leave undone that which he would like to do. A preference for 
one's own way shows itself rather early in the lives of children. 
Doubtless all of us feel bitter at times regarding some act 
of some governing agency or authority. Generally, however, 
we are able to keep these feelings under sufficient control to 
enable us to obey law and support the government. In other 
words, we generally see the necessity of government, however 
disagreeable it is at times to be forced to submit. Occa- 
sionally, however, an individual will react in the other way ; 
that is, his repugnance will overcome his judgment. He has 
no particular philosophy, though he can always invent a reason 
or an excuse. A policeman, a court, or a flag, or any other evi- 
dence or symbol of government is as a red rag in his face ; 
it causes anger, resentment, and insurgency, and nothing 
else. Such people are sometimes very adorable in other 
respects. So long as their feelings are properly soothed they 
may be exceedingly affectionate and loving. Those who know 
them personally find it difficult to reconcile their general 
personal qualities with their feeling against government, 



ANARCHISM 561 

Nevertheless, from any broad and philosophical point of view 
they are among the most dangerous members of society. They 
are the unadapted in a very important social and psychologi- 
cal sense. Psychologically they are as unfit for living under a 
settled, orderly government as a fish is physically unfit for liv- 
ing out of water. The process of evolution which, according to 
Spencer, would eventually produce the delectable state of 
society described in the above extract is steadily weeding such 
people out. They insist on bumping their heads against the 
walls of the universe, and destroying themselves along with 
the criminals and others who are unadapted to a settled civil 
life. If by the meek we mean merely the adaptable, the teach- 
able, and the reasonable, and if by the unmeek we mean the in- 
tractable, the unteachable, the self-willed, the pig-headed, then 
it is probably a scientific proposition to say that the meek '' shall 
inherit the earth," that is, survive, while the unmeek shall be 
exterminated by the slow but sure process of evolution. This 
will be the ultimate cure for this type of anarchism. 

There is still another type of anarchist who is merely mean 
and bent on making trouble. He can always be relied upon 
to be on the wrong side of every question. Wherever decent, 
self-respecting men and women are in general agreement on 
any subject, he will always be found opposing them. It is true, 
he does not always go in for anarchism. He is found in every 
movement which gives him a chance to vent his general hate 
and spitefulness. Wherever there is a chance to denounce 
government, religion, law, order, morality, chastity, sobriety, or 
anything else that is of good report, his voice is always heard. 
He generally tries to get into good company by calling himself 
a radical, an iconoclast, or a revolutionist, knowing that excellent 
men and women have been called by all of these names. He, 
however, is none of these things ; he is just plain '' ornery." 

Is patriotism a vice ? There are various other views, some 
of them of an idealistic nature, which savor of anarchism and 
lead to absurd conclusions on practical subjects. One of these 



562 PRINCIPLES OF POLITICAL ECONOMY 

is that patriotism is a vice. This strange doctrine is advanced 
on grounds of the broadest humanitarianism. We should love 
all men equally, it is urged, without regard to race, color, creed, 
or nationality. The patriot cares more for his fellow citizens 
than for the citizens of other countries ; therefore, according 
to this type of anarchism, he is narrow in his views. More- 
over, if he thinks more of his fellow citizens than of others, 
this will lead him, in case of war, to try to kill the citizens of 
the enemy country. Killing, it is argued, is murder. The fact 
that it is done as an act of war does not in the slightest degree 
change its character. 

When a great world state exists, then, of course, it will be 
proper to be patriotic toward it. We may even work consist- 
ently for it. But to condemn all patriotism for lesser states 
would, if this condemnation were effective, merely destroy 
existing states, and all law and order, and land the world in 
chaos. Family sentiment is narrow in the same sense that 
national sentiment is narrow. The man who loves his wife 
must care more for her than for other women. This, and all 
other forms of family sentiment may, in a sense, make us 
narrow, but it does not follow that it is bad to be narrow. 
Again, if we are to avoid narrowness, why be humanitarians ? 
Are not many animals also companionable and lovable ? To 
show a preference for men is to be narrow in the sense in 
which we have been using that word. 



CHAPTER XLVIII 

THE SINGLE TAX 

Meaning of the single tax. By the single tax is meant a 
policy under which all the public revenue is to be raised by the 
single tax on land value. One of the most persistent misinter- 
pretations of the single tax is that of assuming that it means a 
tax to be raised on real estate rather than on land values. Land 
value is defined as the value of the land itself irrespective 
of all improvements, such as ditching, draining, fencing, the 
planting of trees, and the erection of buildings. In short, every- 
thing done on the land itself to improve the value of an estate 
is classed as an improvement and, under the single tax, would 
be exempt from taxation. This leaves nothing except the 
location value and the fertility value to be taxed. 

The physiocrats, believers in the ** rule of nature,*' believed 
in the impot unique. The original advocates of the single tax 
were a group of French economists called physiocrats. It was 
their belief that land was the original and fundamental source 
of all wealth, and that the rent of land was the only real surplus 
wealth which the community ever produced. From their point 
of view, rent was due to the bounty of nature. They believed 
that every other tax must eventually be paid out of rent anyway, 
wherever it may have been laid by the government. If you tax 
the products of industries, there is no surplus out of which the 
tax can be paid ; as a result you either raise their price or de- 
press the price of the raw materials. If you tax labor, you must 
raise wages accordingly ; if you tax enterprise, you must raise 
profits. Every tax, therefore, is shifted from one to another 
till it reaches the landowner, who alone has a surplus out of 
which it can be paid. The landowner cannot shift it any farther, 

563 



564 PRINCIPLES OF POLITICAL ECONOMY 

and, since he must ultimately pay the tax, they argued that it 
was better for him to pay it directly in the first place than in- 
directly after several shiftings from one person to another. 
They regarded the single tax as a good system of taxation for 
raising revenue, not as an engine of social reform. 

The classical economist regarded rent as a peculiar income. 
The idea that landowners who live entirely upon the rent of 
land are in a peculiar sense nonproducers is by no means 
new. Adam Smith ^ wrote, in 1776, ''As soon as the land of 
any country has all become private property, the landlords, like 
all other men, love to reap where they never sowed, and demand 
a rent even for its natural produce." And again, " They 
[the landlords] are the only one of the three orders whose 
revenue costs them neither labor nor care, but comes to them, 
as it were, of its own accord, and independent of any plan 
or project of their own."^ Economists from Adam Smith 
down have generally agreed on this point, though they 
have not generally agreed that this is the great cause of 
poverty, nor that the abolition of ground rent would be a 
social panacea. 

Ricardo, in developing his theory of rent, laid emphasis upon 
the fact that rent arises from the niggardliness rather than from 
the bounty of nature, thus taking a position opposed to that of the 
French physiocrats. This niggardliness shows itself in two ways : 
first, the best land is always limited in area ; second, its pro- 
ductivity is limited. On any given area the amount of any crop 
which can be produced is limited ; and even before that limit is 
reached, diminishing returns are received from successive appli- 
cations of labor and capital. Because of these limitations upon 
the productivity of the best land, poorer and poorer land must 
be taken into cultivation as the demand for products increases. 
The fortunate possessors of the better grades of land are then 
in a position to demand a rent for their land. 

1 Wealth of Nations, Bk. I, Chapter VI. 

2 Ibid. Bk. I, Chapter XI. 



THE SINGLE TAX 565 

The single tax made an engine of social reform by Henry- 
George. It was the late Henry George, in his book entitled 
'' Progress and Poverty," who seized upon these ideas to make 
the single tax an engine of social reform. He began his in- 
quiry by pointing out that even in the midst of plenty, poverty 
still persisted. He stated that, though the productive power 
of the world had increased manyfold through mechanical im- 
provements, nevertheless large numbers of people remained 
in poverty. In fact, he went so far as to insist that increasing 
numbers were compelled to live in conditions of increasing 
squalor. 

The persistence of poverty the great reproach upon civiliza- 
tion. This phenomenon of the persistence of poverty in spite 
of the world's increase in productive power has been an enigma 
ever since the rise of mechanical industries. Various answers 
have been given to the puzzle. Karl Marx and his followers 
attributed it to the fact that the owners of capital absorb all 
the benefits of the increase in productive power, leaving the 
nonowners of capital no advantage whatsoever. 

It is very easy to say — in fact, it looks like mere arithmetic 
to say — that, with the same rate of productiveness, if certain 
classes who are now receiving large incomes should not receive 
them, there would be more left for other people. If the incomes 
of capitalists and landowners were cut off, more would be 
left for the laborers, provided the total production remained 
the same. It would be equally true from an arithmetical 
standpoint to say that if the skilled laborers and the high- 
salaried people did not receive so much, more would be left 
for the rest, if the rate of production remained the same. In 
other words, if you assume a given rate of production, and then 
assume that the incomes of certain classes are cut off, you can 
demonstrate that this would leave more goods for the other 
classes. This, however, is not a convincing argument. If any- 
one performs an important function in society, and thereby 
makes society richer, it cannot be said that by cutting off this 



566 PRINCIPLES OF POLITICAL ECONOMY 

person's reward for performing his function, society will be 
improved. By the cutting off of his reward there is the danger 
of killing the goose that laid the golden eggs ; by so doing 
you may reduce his motive for labor and cause him to per- 
form a less important function than he would if he were 
adequately rewarded for his effort. The real question is, there- 
fore, whether the capitalist performs a function in society com- 
mensurate with the reward which he receives. If the answer 
is in the affirmative, the cutting off of his income would hardly 
be a help to society. The same reasoning applies to the 
landowner ; if he performs a function commensurate with the 
reward which he receives, it would obviously not help matters 
to cut off his income. So here again the real question is whether 
or not the landowner performs a function commensurate with 
the reward which he receives. 

Distinction between location value and fertility value. In 
the chapter on Land we saw that the two economic factors in 
land value were location and fertility. In so far as the value 
of land is based primarily on its fertility, that value may be 
easily destroyed and with difficulty replaced ; and, in fact, the 
land of little fertility may, by careful and scientific farming, be 
greatly increased in fertility. This increase would be classed 
as improvement, and the increase in value would be similar to 
the increase which results from ditching, draining, irrigat- 
ing, fencing, clearing, and other forms of improvement. Even 
where the land possessed original fertility, that is, where 
it is known as virgin soil, it may easily deteriorate under bad 
management or improve under good management. It is as 
much in the interest of society that good land be kept from 
deteriorating as that poor land be improved in fertility. If the 
owner of land is allowed the advantages of any improvements 
in fertility which result from his management, no one could of 
course consistently object to it. Again, if he is made to suffer 
some penalty for allowing the land to deteriorate in fertility 
by his bad management, it would seem equally just. 



THE SINGLE TAX 567 

Putting these two propositions together, it seems as though 
the owner of the land, whether it be good or poor land, should 
be rewarded for any improvement resulting from his good 
management, and penalized for any deterioration resulting from 
his bad management. If the single tax were applied rigidly, 
and the value not only of the location but of the soil itself 
were taxed away, the owner would get neither reward nor 
penalty. That is to say, if he were taxed for the full value of his 
land, while the soil possessed its original fertility, he could easily 
''mine" the soil, as it is called ; that is, he could rapidly exhaust 
the fertility and pocket the temporary advantage from it. Then, 
after the land became less valuable, the tax would have to come 
down, or the owner could abandon the land or turn it over to 
the state, whenever it became so poor as not to be worth the tax. 

But if he is allowed the full value of the fertility of his soil, 
he has a much stronger motive for preserving or increas- 
ing its fertility. In the pursuit of this advantage, or in the 
warding off of the disadvantage of deterioration, he performs 
an important public function, — that of conserving the fertility 
of the soil. His reward will bear some ratio to the value of 
the service which he performs. To cut off his reward would 
not be to the advantage of the public, because the result 
would be that he would allow the soil to deteriorate, and this 
would result in a smaller production. The rest of society would 
suffer from this policy along with the landowner. The single tax 
would put the owner in the position of a tenant who had to 
pay the sj^te, in the form of a tax, all that the land would 
rent for. Tenants are notoriously, and for excellent reasons, 
careless in the matter of conserving soil fertility. 

In respect to location value, this argument scarcely applies. 
In some cases, it is true, the enterprise of the landowner has 
created location value. This occurs when he himself builds a 
road instead of asking the public to do it, or when he beauti- 
fies a spot and makes it attractive as a place for dwellers, or 
when he builds a trolley line or any other means of access to 



568 PRINCIPLES OF POLITICAL ECONOMY 

his land. He may then be said to have created the location 
value of his land. In such cases all that we have said regard- 
ing fertility value will apply also to location value. 

In most cases, however, the location value is not the creation 
of the individual owner but of the general public, since it is 
the general public, rather than the individual owner, that builds 
schools, libraries, and streets, maintains police systems, and 
brings various utilities within reach. Many notorious cases are 
cited of men who have bought land favorably situated and have 
done nothing to improve it and have even resisted taxation 
and all improvements. Yet, in spite of such inertia, these men 
have found themselves rich as the result of the rise in the 
location value of the land. A few such conspicuous cases 
furnish effective arguments in favor of the single tax. 

A land tax not necessarily a single tax. The arguments for 
a single tax are not the same as for a mere increase of the 
land tax. One may favor the increase of taxation upon the 
location value of land without being in any sense of the word 
a single taxer. He may believe in many different taxes, such 
as the inheritance tax, licenses, the income tax, etc. It would 
be absurd to call such a man a single taxer, even though he 
favored a special tax on the location value of land. Again, 
even though one were in the strict sense of the word a single 
taxer, one might advocate it on purely financial grounds rather 
than on the grounds of social reform ; that is, one might be- 
lieve that all public revenues should be raised from the taxation 
of location values of land merely because he believed that this 
would be an easy way of raising revenue, and not because it 
would go very far toward the curing of poverty. 

The financial arguments in favor of the land tax are fairly 
simple. Land cannot be hidden in the way that much personal 
property is. There may be some difficulty in appraising its value 
for purposes of taxation, but the difficulty is not greater than 
that of appraising for purposes of taxation the value of personal 
property, buildings, or anything else which is taxable. 



THE SINGLE TAX 569 

Again, a tax on location values could hardly be said to have 
a repressive effect at all. If the tax on the products of indus- 
tries tends to discourage production, this cannot be said to be 
true of land. Since location values are not produced by the 
payer of the tax, there is no production to discourage. You 
may tax land and still have it in undiminished quantities. As 
a cold-blooded financial proposition this has some merit. Even 
though one may take away from the landowner all its location 
value, the land itself still exists in undiminished quantities. 

Arguments for the single tax. The argument for the single 
tax as an engine of social reform rests on three general 
propositions. In the first place, since those who receive rent 
because of the location of their land create nothing in return 
for the rent they receive, their incomes are merely subtracted 
from those of the rest of society. If their incomes should be 
taken away, this would not in any degree diminish the total 
productiveness of the community. By a mere process of arith- 
metic it is easy to show that if the incomes which they now 
receive were divided among the rest of the people, these other 
people would have larger incomes. 

Is land kept out of use for speculation? In the second 
place, it is alleged that a great deal of land is kept out of use 
for speculative purposes, and that a high tax on land values 
would force this land into use. The validity of this argument 
is doubtful. The illustrations given are usually those of tracts 
of land found lying idle in cities and suburbs. The owners 
are holding them apparently in the hope of getting a higher 
price in the future. It is easy to jump to the conclusion that 
if there were no prospect of gain by so doing, the owners would 
at once find a use for the land or sell it to others who could 
use it; but this does not take into consideration the fact that 
there may be no immediate use to which the owner could 
profitably put the land. 

If an individual, Jones by name, has a tract of land which 
is not being used, there is no reason for believing that he 



570 PRINCIPLES OF POLITICAL ECONOMY 

would be averse to getting some income year by year while 
the land itself is rising in value on his hands. Thus he would 
get the rise of the value of the land just the same as though 
it were idle, and he would get, at the same time, whatever 
income it would bring him. There are not many men who 
deliberately prefer a smaller to a larger income. If he knew 
that by putting $1000 into even a small building, or $100,000 
into a large one, he could rent the building for enough to pay 
the interest on what it cost him, together with insurance, 
deterioration, etc., and have left even a small sum in addition, 
he would certainly be willing to have the small additional sum. 
If, however, he did not see the opportunity to use or rent such 
a building, but, on the contrary, foresaw that he would be obliged 
to lose a part of the interest, insurance, or deterioration, there 
would be no motive for him to have it built. In that case, even 
if he had to pay the single tax, he would still leave the land 
idle. He would rather pay the single tax without additional 
loss than to pay it and incur an additional loss besides. 

The only common cases in which the land is actually kept out 
of use because of speculation are where garden land is pur- 
chased and divided into building lots in advance of the demand 
for them. After the division has been made, the land is no 
longer suitable for farm land or garden tracts, because it is 
broken up into parcels too small to be cultivated economically. 
Meanwhile the public may be slow in buying the lots for 
building. The result is that for a number of years this land 
practically goes to waste. 

A heavy tax on land would exempt other forms of property. 
A third argument for the single tax is to the effect that when 
a large amount of revenue is raised from a tax on land, there 
is no necessity for so high a tax, probably no necessity for any 
tax whatever, on other things. This reduction of taxation on 
other forms of property would serve as a stimulus to greater 
production. When, for instance, a farmer finds that his cattle, 
his crops, and his buildings are not taxed, or not taxed so 



THE SINGLE TAX 571 

heavily, he is encouraged to develop these forms of property. 
If, as stated above, the taxation of location values of land 
enables the public to raise enough revenue from this source, 
and thereby to eliminate the taxes on all other things, this will 
tend to stimulate business and production in general. This 
argument is based on the repressive character of other forms 
of taxation than the land tax. 

It is probably true that if the incomes of landowners which 
come to them in the form of rent or location value were 
cut off, more would be left to divide among others ; that if 
land values were taxed away, a few owners would be forced 
to use land which is now idle ; and that if a heavy tax were 
put on the location value of land, the taxes on other things 
could be greatly reduced, thereby stimulating production. The 
combined result of these three things would be to the profit of 
the nonlandowning classes. The unskilled laborers and other 
poor people would probably gain a fraction of this general 
advantage, along with all other nonlandowning classes, such 
as merchants, bankers, manufacturers, professional men, and 
skilled laborers ; but that it would greatly alleviate poverty is 
a proposition which may be regarded as very doubtful. 

Putting idle talent to work. A fourth argument, not usually 
brought forward by single taxers, may be added to this list. 
In so far as certain owners of valuable land are enabled to live 
on the rent which comes to them because of its location value, 
and to remain idle instead of doing productive work, the com- 
munity loses the productive power of these men. This is more 
important than all the land kept out of use for speculative pur- 
poses. If such persons were deprived of their incomes and 
thereby forced to do productive work, the community would 
gain by this addition to its list of productive workers. This 
would make for national prosperity. 



CHAPTER XLIX 

CONSTRUCTIVE LIBERALISM 

What the liber alist believes. A liberalist in economics is 
one who believes in the freedom of the individual rather than 
in compulsion, either by the mass or by a despot. He relies 
mainly but not exclusively upon individual initiative. He be- 
lieves that individuals will, without compulsion and under free- 
dom of contract, do whatever is necessary to provide for the 
needs of the community. He believes that it is not necessary 
continually to impose upon the individual the authority either 
of a benevolent despot or of a well-meaning majority. In 
somewhat extreme cases, such as can be covered by the crim- 
inal law, laws for the enforcement of contracts and other obli- 
gations, and laws for the standardization of various aspects of 
business, compulsion is necessary and helpful. He believes 
that the interests of the public are expressed quite as accu- 
rately on the market and through the price lists as through 
the ballot box and the statute books. He even believes that 
poverty and most of the social ills can be eliminated under the 
system of voluntary agreement — freedom to accumulate, to own, 
and to operate private property — and without subjecting individ- 
uals to the necessity of becoming government employees. 

Freedom versus compulsion. There are only two ways of 
getting men to do what is necessary for their own maintenance 
and that of the public ; one is to induce them by the offer of 
a reward either of a material or of an immaterial kind ; the other 
is to compel them by authority. For example, an army can be 
recruited and men led to fight for their country either by the 
volunteer system or by conscription. The one is the method 
of freedom ; the other is compulsory so far as the individual is 

572 



CONSTRUCTIVE LIBERALISM 573 

concerned, whether the government be despotic or democratic. 
In the case of despotism a despot exercises compulsion over 
the individual ; in the case of a democracy it is the mass 
which exercises the compulsion. On general grounds popular 
government is very much better than despotism ; but so far as 
the conscripted individual is concerned, he has no more choice 
as to whether he will fight or not in one case than in the other. 

Industries may likewise be recruited on the volunteer system 
or by conscription. Men may be induced to work on the farms 
and in the factories and mines by the offer of wages, profits, 
etc. or they may be directed by authority to do so. 

If no one were allowed to accumulate capital or to own a 
farm, or a factory, or a mine, we should have much less free- 
dom to choose our own occupations and to direct ourselves 
than we have under a system of free private enterprise and 
voluntary agreement. Even in an army the higher officers 
are not conscripted, though there is a story of a man who 
went into hiding until the government should begin to draft 
captains. Under a regime of complete government ownership 
and operation, men would have to be chosen by authority for 
the higher as well as for the lower positions in the industrial 
system. 

Opposed to socialism. That there would be less freedom 
under universal government ownership than under private 
ownership will be clear to anyone who will stop dreaming long 
enough to think about it. No one could begin farming on 
his own initiative under that system, but would have to be 
placed in charge of a farm, or told to work under a boss, 
according as those in authority should decide. Under a lib- 
eralistic system anyone who can handle a farm successfully 
can become a farm manager and ultimately a farm owner, as 
thousands have already done. By serving an apprenticeship as 
a farm hand under a free contract with another free man, 
if the farm hand is a success he can always, after a few 
years of experience, become a share renter. Again, making a 



574 PRINCIPLES OF POLITICAL ECONOMY 

contract with another free man, if he can make a success 
of this he can in a few more years become a cash renter. 
Again, if he is successful he can become a mortgaged owner, 
and finally a free owner. 

Every stage of this advancement is conditioned upon his 
making a success of the next lower stage. If he can, it is, 
according to the philosophy of liberalism, economical of the 
human resources, as well as of the farms, that he should be 
advanced until he finds his level. If he cannot make a suc- 
cess in any one of these stages, it is a sign that he has reached 
or passed his level, that he has risen as far as, or farther than, 
it is economical that he should rise. It would be a waste of 
both human and material resources to advance him farther. If, 
for example, he can succeed as a farm manager, it would be 
wasting a good manager to leave him in the position of a farm 
hand. In the interests of the community he should advance. 
But if he would make a poor manager, it would be wasting other 
labor, as well as material equipment, to have them placed under 
his management. Under the system of free contract each man 
tends to find the place in the industrial system in which he 
can best fit. This is the method of trial and error. Each indi- 
vidual tries himself out and does not have to wait for the 
consent of someone else. Under the system of universal gov- 
ernment operation the would-be farmer would have no better 
chance to test himself, or to advance on his own initiative, than 
he now has in the army or in the civil service. 

The liberalist believes that, in general, the volunteer plan 
is better than the compulsory one. There are, of course, occa- 
sions when compulsion becomes necessary. These are usually 
occasions of acute and instant necessity, when there is not time 
for the market to adjust itself and to organize a volunteer 
system. 

In time of war compulsion takes the place of freedom. So- 
cialists are in the habit of saying that in time of war nations 
turn to socialism. It is true that in time of war compulsion 



CONSTRUCTIVE LIBERALISM 575 

is generally, or at least to a considerable degree, substituted 
for freedom ; but the whole business of war is compulsion. Our 
dealing with foreign enemies is necessarily on a compulsory 
rather than on a voluntary and contractual basis, and the whole 
organization of society may have to be changed from freedom to 
compulsion in order to carry on the compulsory business of war. 

There are a multitude of minor forms of compulsion besides 
war itself. Taxation is a compulsory payment of money to 
the government. Conscription is compulsory military service. 
Forced loans are compulsory in a high degree. The censorship 
of the press is merely compulsory regulation of the business of 
selling talk for private profit. It may be necessary, in order to 
prosecute a war successfully, to resort to compulsion in recruit- 
ing munition factories and even farms. Rationing the popula- 
tion in time of food scarcity may be necessary. 

In a regime of universal compulsion some must necessarily 
be treated better than others. Even though conscription be 
carried out without personal favor, the result works to the dis- 
advantage of those drawn by conscription as compared with 
those not drawn. Those on whom the lot falls act as shock- 
absorbers for the rest of the community. There is nothing 
particularly democratic about this, though it may be the best 
possible way of meeting a national crisis. Under such condi- 
tions, when the life of a nation is at stake, it does not stop for 
the niceties of social justice. Necessity knows no law. It is 
probable, however, that as a result of several years of this 
compulsion there will be so much dissatisfaction and sense of 
unfairness as to provoke a strong reaction against compulsion 
and in favor of the volunteer system, not only in the work of 
fighting but in business and industrial pursuits as well. We 
may consider ourselves fortunate if this reaction does not carry 
us too far in the direction of license and impatience with 
all restraint. 

Dangers of freedom. Freedom of trade — freedom to buy and 
sell, to offer and accept rewards — is a part of the program of 



576 PRINCIPLES OF POLITICAL ECONOMY 

liberalism. There are, however, some very serious results 
which accompany freedom of bargaining. We saw in the last 
chapter that the advantage in bargaining is always on the side 
of those who are trying to sell something which is undersupplied 
or of those who are trying to buy something which is over- 
supplied. Conversely, the disadvantage is, of course, on the 
side of those trying to sell something which is oversupplied 
and of those trying to buy something which is undersupplied. 
When there is a long-continued oversupply of certain com- 
modities or of certain kinds of labor, those who are under the 
disadvantage of trying to sell them feel, naturally enough, that 
the advantages of free contract are not so very great, since 
they are playing a losing game. They are frequently willing to 
take their chances under some form of compulsion, feeling 
that they could not be much worse off than they are under the 
system of free contract. 

The situation of those trying to sell something that is over- 
supplied, especially if it happens to be labor, is summarized in 
the statement that '* liberty is frequently the liberty to starve." 
It must be confessed that liberty is dangerous, even though it 
is very precious. Severe conditions are imposed on free men. 
Liberty to be on the street may mean liberty to get run over 
by an automobile. Liberty to go swimming may mean liberty 
to drown. Liberty to sail the seas may mean liberty to get 
shipwrecked. Children who are restrained in their liberty and 
are forbidden to be on the street are in less danger of being 
run over, and those who are prevented from going in swim- 
ming are in less danger of being drowned. Liberty is a terrible 
thing, but at the same time it is, for grown men, beyond price. 
Liberty to buy and sell may mean liberty to become bankrupt. 
The individual who has a guardian to forbid him to do any 
bargaining whatsoever may be saved from bankruptcy. 

Advantages and disadvantages of freedom of contract. We 
saw in the last chapter that when farm products are over- 
supplied, as they were in the early nineties of the last century, 



CONSTRUCTIVE LIBERALISM 577 

the farmer is at a disadvantage in bargaining. When he was 
compelled to take low prices for his products, in many cases he 
was impoverished. There are only two possible ways out of 
such a difficulty : the first way is to restore the equilibrium 
between the demand and supply, so that the prices of products 
shall rise to a remunerative level and the farmer be enabled to 
bargain advantageously; the second is for the government to 
exercise its power of compulsion in favor of the farmer and 
against those who have the advantage on the market. At the 
present time (19 17) the reverse of these conditions exists. The 
consumer is the one who is at a disadvantage, since he is trying 
to buy undersupplied goods. Again, there are two ways out : 
first, to increase the products and restore the equilibrium 
between the demand and supply ; second, for the government 
to resort to some sort of compulsion in favor of the consumer 
and against the farmer or the dealer. The liberalist is one who 
prefers to restore the equilibrium and then allow the free 
bargaining process to go on. 

In much the same way there has been what seems like a 
chronic oversupply of the lower grades of unskilled labor. 
This has made it difficult for the unskilled laborers to secure 
remunerative wages ; that is, wages high enough to support their 
families in comfort. At the present time in the United States 
of America (19 18) there appears to be a scarcity, or at least 
there is no longer such an oversupply, of labor as formerly 
existed. Immigration from Europe has almost ceased, owing 
to the European war, and at the same time the country is try- 
ing to expand various lines of production. 

In ordinary times, however, for some hundreds of years 
back, the unskilled laborer has been at a disadvantage. A great 
many sympathetic people have assumed that there was some- 
thing inherent in the nature of labor that put the laborer 
at a disadvantage, and something inherent in the nature of 
capital that put the capitalist at an advantage in the bargain- 
ing process. This is not true, although, as we have seen above. 



5/8 PRINCIPLES OF POLITICAL ECONOMY 

conditions have generally been more favorable for the capitalist 
than for the unskilled laborer. But whenever and wherever 
unskilled labor has been hard to find, the advantage has been 
quite as much on the side of the unskilled laborer, and the 
disadvantage quite as much on the side of the employer. 
Whenever it has been possible for an employer to hang out 
his shingle saying *' Men Wanted " and have ten men apply 
for each position, the conditions have been favorable for the 
employer and unfavorable for the laborer. The fact that there 
are more men applying for jobs than there are jobs to be had 
is a sure indication of an oversupply of labor. The case is 
parallel to that which would exist if a buyer of wheat could 
hang out a sign '' Wheat Wanted " and have many times more 
wheat offered than he could buy. That would be a sure indi- 
cation of the oversupply of wheat. On the other hand, if a 
farmer should put up a sign which read '' Wheat for Sale " 
and find that many more buyers than he could supply were 
coming to purchase wheat, that fact would indicate an under- 
supply of wheat. Similarly, if a laborer, by putting out a sign 
''Job Wanted" should have several employers coming after 
him, this fact would indicate an undersupply of labor. 

Making the advantages even on both sides. The policy of 
the constructive liberalist is indicated by these observations. 
It is his opinion that conditions can be created under which 
the average employer will find it as hard to get a man to 
work for him at liberal wages as the man will find it to get 
an employer to hire him at those wages. When that is accom- 
plished, the advantages in bargaining will be about even. 
Labor would no longer be under a handicap in the bargaining 
process. Laborers will no longer feel the need of some com- 
pulsory restriction upon bargaining but will feel quite able to 
take care of themselves without help from the government or 
any other compulsory agency. 

A program looking in this direction may take a little longer 
to work out, but from the point of view of the constructive 



CONSTRUCTIVE LIBERALISM 579 

liberalist the results once achieved are vastly preferable to any 
achieved under a compulsory system. There is an old story 
about a wagoner, one of whose wagon wheels got into a deep 
rut. Instead of trying to extricate it he sat down by the side 
of the road and called upon Hercules to aid him. The story 
goes that Hercules replied that if the man would put his 
shoulder to the wheel, he could get out of the difficulty with- 
out calling on outside help. This, according to the liberalist, 
represents a general tendency in human nature. The govern- 
ment is our Hercules, and whenever we get into difficulties 
we are in the habit of sitting down and crying vociferously 
for the government to come and do something. Even though 
we have only the vaguest ideas as to what the government 
could do, we still insist that it do something or other. To be 
sure, there are some things which only the government can 
do. No other agency than the government can be intrusted 
with any kind of compulsion ; and if compulsion is necessary, 
of course we must then call upon the government. To 
paraphrase an old remark, the individual's extremity is the 
government's opportunity. 

"Doing something** for people. Beneficence is, of course, 
a characteristic of good government ; but many of us, accord- 
ing to the liberalist, have never reached the point where we 
can understand that a '' beneficent letting alone " is sometimes 
the most beneficent thing the government can give us. There 
are many people who feel that when they are ill the doctor 
must '' do something." They do not realize that sometimes 
the most beneficent thing the doctor can do is to do nothing. 
A doctor whose desire is to please his patients may feel under 
some compulsion to do something for them, even if it is noth- 
ing more than to give them bread pills. From the standpoint 
of the liberalist much of our so-called social legislation consists 
of bread pills. 

Sometimes, however, it is really necessary that the doctor 
should do something. The doctor whose skill consists in his 



580 PRINCIPLES OF POLITICAL ECONOMY 

ability to cure sickness rather than to please patients will have 
enough to do, provided the people know enough to appreciate 
him. The same may be said of a government. There are a few 
really vital things that a government may do. If it succeeds 
in doing these few things well, it will then be unnecessary to 
do the thousand and one trivial things that it is asked to do. 

So far as this country is concerned, probably the most far- 
reaching and constructive piece of legislation in the last genera- 
tion has been the restriction of immigration. This is one of the 
few acts of the government which go directly to the root of 
the difficulty of low wages and poverty. It is an act which 
definitely aims at reducing the oversupply of unskilled labor. 
It is true that it does not go far in this direction, but at least 
it indicates to the public that the government has recognized 
the source of the difficulty and is no longer proceeding on 
general guesswork in an attempt to overcome it. If it will go 
a little farther in the same direction, it will make unskilled 
labor so scarce and hard to find that the unskilled laborer will 
no longer be at a disadvantage, but can bargain on even terms 
with employers and secure living wages for himself without 
help from anybody. 

A low standard of living and a high birth rate. But immi- 
gration from Europe and Asia is not the only source of over- 
supply of unskilled labor. The inordinately high birth rate 
among the ignorant and unskilled is another large source of 
cheap labor. Nothing, apparently, but a rise in the standard 
of living will reduce the volume of this stream. A rise in the 
standard of living means an increase in the number of things 
which the average man or woman thinks necessary to the 
support of the family. The more things they feel they must 
have before they can marry and support a family, the longer 
they will postpone marriage. The longer they put oif marry- 
ing, the smaller number of children there will be in the family, 
partly, at least, because the child-bearing period of the wife is 
reduced. If the age of marriage is raised on the average from 



CONSTRUCTIVE LIBERALISM 581 

eighteen to twenty-three, there are five less years during which 
the wife may bear children. 

Families too small among the educated classes. The restric- 
tion of immigration among the ignorant and unskilled, of 
course, has nothing to do with the restriction of immigration 
among the educated and skilled. The latter are as free to come 
as when immigration was unrestricted. Similarly, a rise in the 
standard of living among the ignorant and unskilled has nothing 
to do with the marriage and the birth rate among the educated 
and skilled. Among the latter classes the reform ought to 
proceed in quite the opposite direction. There is no doubt 
that among these people marriages are postponed too long, 
and the average families are too small. 

Increasing the supply of employers. The decrease in the 
number of people born with the heredity and prospective train- 
ing which fit them for skilled positions, and for positions in the 
ranks of the employing class, tends to reduce the demand for 
unskilled labor. Hitherto, unskilled laborers have suffered from 
two causes : the fact that there have been too many unskilled 
laborers, and the fact that there have been too few employers. 
It is as though, in the badly balanced ration of an individual 
or an animal, the too abundant ingredient, say starch, were to 
be increased more and more, and the too scarce ingredient, say 
protein, were to be decreased more and more. The combined 
result of increasing the one and decreasing the other would pro- 
duce a more and more unbalanced ration, to the detriment of 
the man or the animal. The continuous increases in the ranks 
of the unskilled laborer through immigration and the high birth 
rate, and the decrease in the highly skilled and managerial labor 
through the postponement of marriage, and various other causes, 
has produced a progressively unbalanced population, tending 
to make unskilled labor very cheap and highly skilled and 
managerial talent very dear. 

Fortunately the effect of this combination of processes has 
been offset, at least partially, by our system of popular education. 



582 PRINCIPLES OF POLITICAL ECONOMY 

Such a system of universal and popular education has the 
effect of redistributing talent, of taking young people who 
would otherwise have remained in the ranks of the unskilled 
and training them for the ranks of the skilled, the managerial, 
and the entrepreneur class. This tends to reduce the supply 
of ignorant laborers and increase the supply of educated workers. 
If the system of popular education continues to improve, and 
greater and greater restrictions are placed upon the importation 
of unskilled labor, and a higher standard of living is acquired 
by our own unskilled laborers, the combined results of these 
three changes will tend to make unskilled labor scarce and 
hard to find, and to make jobs abundant and easy to find, and 
give the unskilled laborer the advantage not only of retaining 
his liberty of contract but of prospering under it. If we carry 
out our educational policy to its logical limit, and train not only 
skilled laborers but also managers and employers, and at the 
same time create a more rational standard of living and better 
moral conditions among these classes, the combined results of 
these two policies, that is, training men for the high positions 
and encouraging larger families among them, will so increase 
the numbers of the managerial class as to take away their 
present advantage in the bargaining process. By following 
this general process throughout all ranks of society we may 
expect in a short time so to even up the advantages of bar- 
gaining as to give us something approximating equality without 
substituting compulsion for freedom. 

Thrift and the laborer. The encouragement of thrift will 
tend in the same direction and will accelerate the process of 
putting unskilled labor in a position to prosper under freedom. 
It is through thrift that capital accumulates. When capital be- 
comes so abundant that the average owner of capital has great 
difficulty in finding an opportunity to use it, he will have to be 
content with a smaller share in the products of industry. 

The encouragement of productive enterprise, the frank 
acknowledgment of our obligation to the man who shows the 



CONSTRUCTIVE LIBERALISM 583 

ability to plan a new enterprise and, what is vastly more im- 
portant, to make it actually succeed, will do a great deal to ex- 
pand the opportunities for those of us who do not possess that 
kind of ability. The more such men we can develop in our 
midst, the more our industries will expand and the more oppor- 
tunities for remunerative employment there will be for the 
rest of us. 

Poverty easily curable under freedom. We need not have 
poverty in our midst a generation longer than we want it. 
By setting to work deliberately to balance up our population, 
making ignorance and lack of skill to disappear, and making 
technical training and constructive talent to increase, we can, 
in a short space of time, make low wages and poverty a thing 
of the past. What is even better, we can do this and still 
leave everyone a free man. This is the gospel of the new, or 
constructive, liberalism which is destined to bring relief, if 
not to this nation, at least to some nation which has the wis- 
dom to adopt it, and which, when adopted, will keep that nation 
in the position of leadership among all the nations of the earth. 



A LIBERALIST'S PROGRAM FOR THE COMPLETE ABOLITION 
OF POVERTY 1 

L Legislative Program 

A. For the redistribution of unearned wealth. 

1 . By increased taxation of land values. 

2. By a graduated inheritance tax. 

3. By control of monopoly prices. 

B. For the redistribution of human talent. 

I . By increasing the supply of the higher, or scarcer, forms of talent. 
{a) By vocational education, especially for the training of 

business men. 
{b) By cutting off incomes which support capable men in idleness. 

1 Compare the author's work entitled " Essays in Social Justice," Chapter 
XIV. Harvard University Press, 191 5. 



584 PRINCIPLES OF POLITICAL ECONOMY 

2. By decreasing the supply of the lower, or more abundant, forms 
of labor power. 

(a) By the restriction of immigration. 

(b) By the restriction of marriage. 

(i) By the elimination of defectives. 

(2) By the requirement of a minimum standard income. 
{c) By a minimum-wage law, 
{d) By fixing building standards for dwellings. 

C. For the increase of material equipment. 

1 . By increasing the available supply of land. 

2. By increasing the supply of capital. 

{a) By encouraging thrift versus luxury. 
(J?) By building up savings institutions. 
{c) By making investments safe. 

II. NONLEGISLATIVE PROGRAM 

A. For raising the standard of living among the laboring classes. 

1. The educator as the rationalizer of standards. 

2. Thrift and the standard of living. 

3. Industrial cooperation as a means of business and social education. 

B. For creating sound public opinion and moral standards among 

the capable ; for example, 

1 . The ambition of the family-builder. 

2. The idea that leisure is disgraceful. 

3. The idea that the productive life is the religious and moral life. 

4. The idea that wealth is tools rather than a means of gratification. 
,5. The idea that the possession of wealth confers no license for 

luxury or leisure. 

6. The idea that government is a means, not an end. 

7. Professional standards among business men. 

C. For discouraging vicious and demoralizing developments of public 

opinion ; for example, 

1 . The cult of incompetence and self-pity. 

2. The gospel of covetousness or the jealousy of success. 

3. The idea that the capitalization of verbosity is constructive 

business. 



INDEX 



Adams, H. B., 294 
Adams, Henry C, 503, 507 
Advertising, 253 
Agricultural credit, 314 
Agriculture, 215 
Anarchism and socialism, 555 
Animal power, 238 
Armageddon, the real, 499 
Authority, exercise of, 57 

Bacheller, Irving, 49, note 

Bagehot, 50 

Balance-of-trade argument, 340 

Banana, the, 150 

Bank check, origin of, 306 

Bank of England, 309 

Bank notes, 309 

Banks, essential work of, 305 

Bargaining, comparative advantages 

in, 400 ; collective, 402 
Bastiat, Frederic, 73 
Brands and trade-marks, 326 
Buckle, Henry T., 80, 81, 150, note 
Bullock, C. J., 223, note 

Capital, how increased, 99 ; definition 
of, 155; productivity of, 167, 425; 
reason for scarcity of, 429 

Cattle trail, the Texas, 201 

Civilization, the pent-up versus the 
expanding type, 151 

Clearing house, 306 

Closed shop, 405 

Collective bargaining, 402 

Communism, meaning of, 531 ; rela- 
tion of, to anarchism, 532 ; experi- 
ments in, 533 ; American experi- 
ments in, 535 ; results of, 539 



585 



Communistic societies, American, 536 
Competing power, formula for, 496 
Competition, 42 
Competitive consumption, 45 
Compulsion, elimination of, 506; ver- 
sus voluntary agreement, 47 ; versus 
freedom, 531 ; occasional necessity 
for, 546 ; necessity for, in war time, 

574 
Confidence and economy, 53 
Conflict, of interests, 36 ; forms of, 

38 

Consumers, idle, 68 

Consumers' goods, classes of, 472 

Consumption, meaning of, 453 ; im- 
portance of, 454 

Cooperation, where successful, 44 ; 
fields for, 46; limiting factor in, 
178 

Corporation, the, 169; some weak- 
nesses of the, 170; character of 
the, 171 ; size of the, 172 

Cost, 283 ; is disinclination, 284 ; 
kinds of, 286 ; pain, 287 ; increas- 
ing, 288 ; of war, 525 

Country people, self-employment of, 
216 

Crime, meaning of, 40 

Crops, location of, 79 ; advantage of 
heavy-yielding, 14S 

Demand and supply, 274 
Dependableness, 106 
Desires, expansion of, 281 
Diminishing returns, law of, 211 ; and 

increasing cost, 288 
Diminishing utility, 278 
Division of labor, successive, 381 



586 



PRINCIPLES OF POLITICAL ECONOMY 



Double taxation, 507 
Dunbar, Charles F., 307 
Durable goods, preference for, 457 ; 
as investment for future, 463 

Economic crises, list of, 331 
Economic goods, 12 
Economics, branches of, 2 
Economy, meaning of, 3 ; necessity 

for, 4 ; enforced, 522 
Effort, irksomeness of, 283 
Ely, Richard T., 229 
Employers, increasing supply of, 581 
Energy, solar, 137 
Enterprise, the lure of, 442 
Exchange, 9, 264 ; advantages of, 338 
Extractive industries, instability of, 

207 

Factors of production, 366 

Fallacies, characteristic, 523 

Farm machinery, 84 

Farmer, independence and depend- 
ence of, 215 

Farming, intensive, 147 ; intensive, 
and poverty, 148 

Federal Farm Loan Board, divisions 

of, 315 
Federal Reserve system, 311 
Federation of trade unions, 404 
Financial crises, 329 
Financing a war, 514 
Fish culture, 220 
Fishing, 198 
Forestry, 219 
Forethought, 104 
Freedom of contract, advantages and 

disadvantages of, 576 
Freedom versus compulsion, 531, 572 

George, Henry, 565 
Getting and spending, 6 
Gold prices, 296 
Goods, 15 



Government, 256 
Government control, 61, 488 

Hadley, A. T., 233, note 

Heredity and training, 115 

Home market, 342 

Human interests, conflict of, 359, 559 

Humboldt, 150 

Huntington, Ellsworth, 82, 332 

Immigration, effect of, 397 

Income and expenditure, 7 

Industrial depressions, 330 

Industries, the indoor, 150; the out- 
door, 208 ; the genetic, 208 

Infant industries, 343 

Interest, functional theory of, 437 

Interest, relation to value and price, 
436 

Interest in others, 27 

International competition, 498 

James, William, 115 
Johnson, John, 293 
Jones, Edward D., 331 
Joy in work, 467 

Kipling, 81 

Labor, 93; division of, 119; advan- 
tages of, 120; organization of, 130 

Labor union, 404 

Laborer and capitalist, 162 

Land, 96 ; economic properties of, 
142 ; differences in desirability of, 
410 

Land tax compared with single tax, 
568 

Law, need for, 50 

Leisure versus luxury, 493 

Leisure class, 67 

Liability, limited, 170 

Liberalism versus socialism, 543, 545 ; 
policy of, 578 



INDEX 



587 



Libertarians and compulsorians, 553 
Lumbering, 203 
Luxuries, 475 

Luxurious consumption, effect on 
labor, 492 

McCulloch, J. R., 477 

Machinery, advantages of, 122 ; farm, 
135 ; and production, 223 

Malthus, 395 

Man power, conservation of, 460 ; 
sources of, 521 

Manufacturing establishments, 221 

Margin of cultivation, 411 

Marginal productivity and average 
productivity, 371 

Market value, criticisms on, 267 

Marketing, essentials of, 318 ; cooper- 
ative, 320 

Marriage, age of, 117 

Marshall, Alfred, 223, 351, note, 474 

Mechanical power, 239 

Merchandising, 249 

Middleman as a timesaver, 246 

Mill, John Stuart, 258, 477 

Mineral lands, 98 

Miser and spendthrift, 463 

Military defense, 346 

Mining, 206 

Money, one form of social capital, 
157 ; a labor-saving invention, 292; 
substitutes for, 293 ; qualities in 
material of, 295 ; kinds of, in United 
States, 298 ; speeding up circula- 
tion, 515 ; amount necessary in war 
time, 516 

Monopoly, 290 

Morality, teaching of, 65 ; reasons for, 
557, 558 

National banking system, 311 
Necessaries, 472 
Niggardliness of nature, 281 
Noncompeting groups, 398 



Occupation, influence of, 214 
Opportunity cost, 285 
Ox, displacement of, 133; historical 
importance of, 135 

Partnership, 168 

Personal utility, 245 

Peschel, 81, 82 

Physiocrats, 563 

Population, geographical redistribu- 
tion of, 188 

Population, law of, 395 

Poverty, how curable, 583 

Power, animal, 132 ; kinds of, 141 

Precious metals, 296 

Prices, control of, 176 

Producers' and consumers' goods, 
260, 261 

Production, definition of, 87 ; length- 
ening process of, 165 ; combination 
of factors of, 165 

Productive, meaning of, 356 

Productive life, promotion of, 52 

Productivity, great law of, 212 

Profits, definition of, 441 

Protective tariff, 348 

Railway, monopolistic character of 
a, 242 

Railways, 240; public or private, 241- 
243 ; short- and long-distance haul- 
ing, 242 

Religion, 81 

Rent, definition of, 409 ; reason for, 
409 ; economists' theory of, 564 

Residual share, 447 

Revenue system, marks of a good, 507 

Revenues, classification of, 503 

Ricardo, 564 

Risk, irksomeness of, 443 

Risk-taking, necessity of, 443 

Robinson, E. V., 188, note, 455 

Ross, E. A., 54, 512 

Rothamsted experiments, 373 



s: 



PRINCIPLES OF POLITICAL ECONOMY 



Savings banks, 305 

Scarcity, causes of, 281 ; of labor, 

causes of, 391 
Scientific management, 186 
Self-centered appreciation, 29 
Self-interest, definition of, 22 ; and 

public uses, 35 
Sexes, interdependence of, 218 
Shaw, Albert, 230, note 
Single tax, 563, 569-571 
Skill, cost of acquiring, 390 
Small industries, decay of, 229 
Smith, Adam, 61, 119, 126, ijo, 256, 

474,511,564 
Smith, J. Russell, 147 
Sobriety, 108 
Social income, distribution of, 10; 

utilization of, 11 
Socialism, and communism, 541 ;. and 

populism, 543 ; and liberalism, 543, 

545 
Society, the cooperative, 177 
Spartan communism, 534 
Spencer, Herbert, 556 
Sprague, O. M. W., 307, note 
Standard of living, 344, 393, 461, 495 ; 

and birth rate, 580 
Standard money, 300 
Standardization, 252 ; and economy, 55 
Steam engine, 140 
Strike, the, 406 

Struggle for existence, 37 i 

Sumptuary laws, 486 M 

Taborites, 534 

Talent, waste of, 70 

Tariff, paid by consumer, 3485 paid 

by foreign producer, 349 ; when 

prohibitive, 350 
Taussig, F. W., 124, note 
Tax, definition of, 504 
Taxation, canons of, 51 1 ; progressive, 

511 ; repressive, 512 



Taxes, inheritance, 509 

Thrift, 105 ; and the laborer, 582 

Tillage, 210 

Token currency, 301 

Tools, compared with machinery, 121 ; 
compared with consumers' goods, 
160; as consumers' goods, 467 ; as 
inducement to work, 468 

Trade union, 403 

Transportation, 233; types in use, 

237 
Trust, the, 175 

Unemployed, the, 66 
United States, geographical advan- 
tages of, 82 
Unskilled labor, scarcity of, 392 
Utopias, 532 

Valuation and exchange, 264 

Value, and esteem, 267 ; and price, 
268 ; economic, 269 ; reasons for, 
272, 273 ; determined by scarcity, 
274; relation of utility to, 275; 
of a man, 458 

Variable proportions, law of, 367 

Veblen, Thorstein, 76 

Vice, as waste of energy, 72 ; control 
of, 487 ; as a fool-killer, 490 

Voluntary agreement, 47 

Wages, causes of difference in, 388 ; 
summary of discussion of, 399 

Waiting, irksomeness of, 429 

Walpole, 223 

War, financing a, 514 

Wealth, two meanings of, 13 ; and 
well-being, 13 ; ten characteristics 
of , 2 1 ; right of men to accumulate, 
69 ; ways of acquiring, 192, 193 ; 
economical ways of getting, 194 

Well-being, social, 8 



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